ture of real interest rates: "Maintaining the real rate around its equilibrium level should have a stabilizing effect on the economy, directing production toward its long-term potential" (p. 8). This vision may be quite true in theory, but practically useless to central bankers for three reasons: (1) How we measure real interest rates is not a simple exercise, especially for long maturities. (2) More difficult is the task of measuring an equilibrium structure of real interest rates. This is a challenging intellectual exercise for doctoral dissertations and learned journal articles. Its science diverges too far from the real world of policy-making "artists," who must practice the "art of central banking," as R.G. Hawtrey saw it. (3) Perhaps most important, this guide to long-term equilibrium rates cannot be of much help to the central bankers coping with week-by-week change from one short-run disequilibrium to the next. In the long run, institutional parameters will very likely be quite different. The Federal Reserve's preoccupation with the "threat" of future inflation during 1993-94 is difficult to rationalize when the CPI rose at a fairly stable rate of 3 percent. The increased volatility in the stock, bond, and foreign-exchange markets is not explained by the solid evidence of steady but modest progress in the real economy of the United States, the most balanced in over two decades. The observer soon had to come to the conclusion that inflation is the Fed's excuse for raising interest rates, but not the real problem. The real problem seems to have been the emergence of financial speculation in the money, credit, and exchange markets on an international scale. Perhaps most disturbing is that monetary policy was being driven by the Fed's need to maintain control over speculation and the mushrooming growth of financial institutions outside its policy reach. In this world of dynamic financial transformation, the full employment growth ...
