Short-Run Objectives of Monetary Policy

Abstract

OF what I have seen of the work of the Commission on Money and Credit, one thing stands out. It is a part of one question addressed by one task force to the Federal Reserve Board, and it reads as follows: Given the customary credit control instruments and the ultimate objectives of price stability, highlevel employment, and economic growth how is monetary policy formulated in the short run? For instance, what sort of factors are weighed in determining current policy, what guides are utilized and what are the immediate objectives of policy? The merits of the Board's reply, the many contributed papers, the Commission's Report, and recent monetary policy itself, are all certainly debatable -but I submit, if you will pardon the use of strong language, that this is a damned good question. It asks, politely but firmly, that we omit the usual garbage about opposition to sin and advocacy of motherhood, and just say what it is we are trying to increase, decrease, or hold still. The Board's reply ran to some 35 doublespaced pages. The burden of drafting was carried by my colleague, Woody Thomas, who was assisted and hindered at various stages by other members of the staff. I would argue that it is a good reply, by any standards, and an outstanding one, after allowance is made for the necessity of producing it in an institutional framework. It is necessarily complicated by the inescapable fact that, even in the short run, the monetary authority is confronted with a variety of measures by which it may judge the impact of its operations. Any single short-run objective has obvious deficiencies. The trouble with the bill rate as an exclusive short-run target is, I think, widely understood. The situation with respect to the use of a free reserve target is somewhat different. This synthetic pearl of a number has many virtues. It is simple, easy to understand, largely devoid of seasonality, closely related to many significant factors affecting policy, and it is published for all the world to see every Thursday. It also has certain deficiencies. So far as I have been able to ascertain, everyone is convinced that he himself understands these clearly, but has grave doubt that anyone else does. I am going to take a giant step and assume that this audience understands both the virtues and vices of free reserves and plunge ahead on that basis. A part of the reply to the question I mentioned at the outset ran as follows: