The Federal Funds Rate
Summary of Remarks made by Governor Edward M. GramlichThe Samuelson Lecture, before the 24th Annual Conference of the Eastern Economic Association, New York, New York In this speech Governor Gramlich addresses the issues that arise when the question of whether the Federal Reserve Board should use rules in the conduct of monetary policy is contemplated. He tells how the Fed once based policies on monetary aggregates and that now many suggest they base them on the federal funds rate. The Fed currently votes on monetary policy based on the judgement of its members.There are several different types of policy rules he discusses. The first is an unconditional rule, for example, having monetary authorities increasing the money supply a certain percentage each year or base a rule on some target objective such as rigid prices and reduce the inflation rate to a certain level. Another intermediate approach could be called a feedback rule. Using this approach, policy objectives are specified in the rule and authorities would react in a regular way to the discrepancies between actual values and the target levels of these variables. Rules also vary in how restricting they are. They can be as extreme as bei
One is that policy is clear, regular, and consistent. Policy makers have no ability to control or make decisions with any other purpose in mind. There are numerous advantages and disadvantages for rules. Sometimes rules may not work or work only under certain circumstances. Using the federal funds rate directly eliminates the effects of shocks in the demand for money. Rules can determine in advance ways to help stabilize the economy and can use complicated lag patterns. Conservative economist Milton Friedman supported the unconditional rule that if the Fed simply increases the money supply by approximately four percent a year; the rate would lead to long-run price stability. But it also takes away many privileges of the central bank. It is also possible for the rules to be simple and informal in order to guide some of the members in their votes. For now, they will continue to help guide policy makers to avoid large mistakes that will effect the whole country. They are helpful when authorities are unsure of how to remedy a situation. There are indirect properties through the behavior of long term bond markets. Passivists, such as Friedman, believe there is no reason to have discretionary policy actions- activist policy is either too little (too much) or too late (too soon). Rule making may become so advanced that monetary rules may become useful in the conduct of monetary policy. This may sound constricting but actual inflation targeting strategies have historically been more flexible.
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