The Making of Monetary Policy: Description and Analysis

At the present time Federal Reserve policy-making may be viewed as having a two-part structure. First, based on a four to eight quarter economic forecast, the Fed selects a target rate of money growth. Second, based on a short-term money market forecast, the Fed selects a Federal funds rate range thought to be consistent with the money growth target. The procedure followed in selecting the money growth target is “state-of-the-art” but the policy implementation based on controlling the Federal funds rate has permitted an undesirable pro-cyclical behavior of the money stock.