7;s in the United States showed us that this is not necessarily true, as we experienced periods of simultaneously high inflation and high unemployment. The tradeoff that we expect is actually a short-term one, and as Alan Greenspan noted, in the long run “lower levels of inflation are conducive to the achievement of greater productivity and efficiency and, therefore, higher standards of living.” It appears that the pursuit of price stability may actually be necessary for maintaining low unemployment, economic growth, and interest rate stability in the long-term.Multi-Stage ProcessThe emergence of price stability as the ultimate goal of the Fed’s monetary policy is not because there has been a decision to choose between conflicting goals, but rather, because achieving price stability facilitates the realization of the other goals of monetary policy over the long-term. Also, price stability appears to offer more value to society than any of the other goals. Not only can it facilitate the stability of some of the other goals, it is highly valued by businesses and individuals. An environment of stable prices makes financial planning much simpler, and thus people are much more willing to make investments in the economy if the future is not as uncertain as it could be. Although the Fed still needs to consider all six goals when making decisions regarding monetary policy, focusing on the primary goal of price stability permits a narrowing of focus and a more concerted effort determining monetary policy. To keep on track toward achieving the goal of price stability, there is a four-step process that is utilized. This process involves the use of the following: 1) policy tools, 2) operating targets, 3) intermediate targets and 4) monetary policy goals. The last step, the monetary policy goals, has already been discussed. To achieve its desired goals, the Fed uses its policy tools to make the appropriate adjustments to t...
