Fed Issues Revised Edition Of Standard Textbook

Thursday, July 07, 2005

The Federal Reserve has published it's ninth revision of the standard textbook "The Federal Reserve System - Purposes & Functions." For a download of the complete 146-page book in pdf-format click here or go here for single-chapter downloads. The book was last revised in December 1994.
While most of the book focuses on a systematic description of the technicals of the US central bank, the chapter "How monetary policy affects the economy" on page 16 is as good a read as the following chapter "Limitations of monetary policy" on page 19. For an explanation of the "Taylor rule" leaf to page 23.
The conclusion can be found on page 25 or here.
All of the guides to monetary policy discussed here have something to do with the transmission of monetary policy to the economy. All have certain advantages; however, none has shown so consistently close a relationship with the ultimate goals of monetary policy that it can be relied on alone. Consequently, monetary policy makers have tended to use a broad range of indicators - those mentioned above along with many others, including the actual behavior of output and prices-to judge trends in the economy and to assess the stance of monetary policy.
Such an eclectic approach enables the Federal Reserve and other central banks to use all the available information in conducting monetary policy. This tack may be especially important as market structures and economic processes change in ways that reduce the utility of any single indictor. However, a downside to such an approach is the difficulty it poses in communicating the central bank's intentions to the public; the lack of a relatively simple set of procedures may make it difficult for the public to understand the actions of the Federal Reserve and to judge whether those actions are consistent with achieving its statutory goals. This downside risk can be mitigated if the central bank develops a track record of achieving favorable policy outcomes when no single guide to policy has proven reliable.

Fed Funds 1955-2004

CHART: A history of the Fed Funds Rate. Source: "The Federal Reserve System - Purposes & Functions."

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