monetary aggregates is also significant, but not absolute, as the Fed cannot control the banks and the non-bank public, who are capable of influencing the money supply as well. The actions of these two groups can have a substantial influence on monetary aggregates. Additionally, their actions, particularly those of the non-bank public can be unpredictable to the Fed and change over time. An example of this is the introduction and rise in popularity of bond and stock mutual funds. This has caused a shift out of some of the assets comprising M2, making M2 growth behave uncharacteristically. Another development in the marketplace may have contributed to the slowing growth of M2 during 1993 – a slowing in refinancing activity caused a run-off of liquid funds. Also contributing to the change in the behaviour of M2 has been an increased opportunity cost of holding M2 assets during 1993 as interest rates on 3-month Treasury bills increased, making it less likely that people would choose to hold these assets. While all of the previous examples contributed to the fact that M2 growth slowed in 1993, they were generally short adjustments and explainable. The bigger issue was that even when taking these factors into consideration, M2 velocity was increasing more rapidly than should be expected, meaning it was becoming less controllable by the Fed’s policy tools.Predictability – There are two problems with the predictability of interest rates as an intermediate target. First, the Fed’s influence over real rates is weaker than its influence over nominal rates. This was discussed earlier, and of course, is correct. There is nothing the Fed can due to nullify this, but they can minimize it by using the data available to develop an estimation of expected inflation that is as accurate as possible. For example, during the course of 1994, the Fed tracked interest rates for bonds of varying maturity. By doing so they can...
