The United States, an Exception in

The United States, an Exception in Monetary Policy and in Results
The United States is a striking exception to the fashion of designating price stability as the target of
monetary policy.
Faced with inflation rates above 10 percent in 1979, it is true, the Federal Reserve shifted its
tactical operating instrument from money-market interest rates (the Treasury bill rate, and the market
rate on overnight interbank loans of “federal funds” — bank reserve accounts in Federal Reserve
Banks), to bank reserve aggregates. For three years 1979–82 the ultimate policy target of the “Fed”
was to bring down inflation. By mid-1982 inflation had fallen to 5 percent and unemployment had
risen from 6 percent to 10.5 percent. At this point the Fed under Chairman Paul Volcker reversed
course, returned to its previous interest-rate operating procedure, and initiated and managed a six-year
recovery, which reduced unemployment below 6 percent while inflation continued to decline.
Under Volcker’s successor Alan Greenspan, United States monetary policy has continued to be
balanced and pragmatic. It has been directed to reduction of unemployment rates and of the “gap”
between potential and actual GDP, as well as to stabilization of inflation. Indeed Congress has mandated
such an approach. The Employment Act of 1946 commits the Federal government, including
the Federal Reserve System, to pursuit of “maximum employment, production, and purchasing power.”
The “Humphrey-Hawkins Act” specifically directs the Fed to aim at both unemployment and inflation
goals. This Act’s numerical targets, 4 percent for each, were long ignored as impractical, but now they
don’t seem so outlandish. Radical Right Republicans have in recent years introduced legislation to
repeal these Acts and to replace them with a pure price stability mandate. The proposal has supporters
within the Federal Reserve System and in private financial circles. However, it seems unlikely to be
adopted, anyway so long as the economy’s macro performance in the present regime continues to be
so spectacularly successful