evaluate the yield curve and the implied expected rate of inflation that is built into it. Second, it is argued that a Fed policy to stabilize interest rates is inconsistent with the goal of steady economic growth. I agree that a goal of interest rate stability may be inconsistent with the goals of steady economic growth or price stability (in the short-term). However, what we are not deciding on the merits of interest rate stability as a goal, but on the merits of the interest rate level as an intermediate target. As an intermediate target the interest rate is not necessarily held constant, but is adjusted to the appropriate level that is necessary to keep the economy on track toward the Fed’s stated goal of price stability. The ability of interest rates to predict the Fed’s ability to achieve its goals is quite effective. As we know there is a strong correlation between interest rates, price levels, and economic growth. Monetary aggregates are also effective at predicting the desired goal. As an example, during an economic expansion, the rising demand for money causes interest rates to rise, which in turn causes a reduction in consumer and business spending, keeping the economy from over heating.ConclusionBased on the preceding analysis it was wise for the Fed to shift toward primarily using interest rates as an intermediate target. Both M1 and M2 were proving to be less controllable than in the past, so using interest rates would be more effective. This is not to say that this change should be permanent. Indeed the Fed will continue to evaluate the targets it uses, and the economic environment may change sufficiently in the future to warrant returning to the use of monetary aggregates. There is also the possibility that an aggregate other than M1 or M2 may prove to be more appropriate for us to rack. Neither interest rates nor monetary aggregates can have all of the attributes the Fed seeks at all times. Ins...
