Abstract

Recent Developments in U.S. Monetary Policy

For years, the Federal Reserve Board tried to achieve its money supply objectives by controlling the interest rate for Federal Funds. This conception was officially given up, however, when the growth rate of the various money supply components exceeded the desired target values to an ever greater extent. Since the decision of the Federal Open Market Committee of October 6, 1979, bank reserves have taken the place of the Federal funds rate, i.e., monetary policy is attempting to reach its money supply goals by controlling bank reserves. A little later, in February 1980, the aggregates of the quantity of money redefined. This step had become ungently necessary because an number of innovations had made various types of deposit available for payments purposes and in effect as liquid as cheque account deposits. The new aggregate M-1B takes account of this change and comprises, in addition to the former supply of legal tender (M-1, now M-1A), also all other credit balances available by drawing cheques on them. The “new monetary policy” was sharply criticized fairly unanimously by both monetarists and Keynesians. The reason for the criticism is above all the extreme fluctuations of the interest rates and the growth rates of the various money supply aggregates which have since occurred.