bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

MONETARY POLICY IN THE USA 441
nant in the bank’s set of goals. The Fed has neither a target rate of inflation
nor a target rate of growth of the money supply, but pays attention to a wide
range of real and monetary indicators. It is required by law to calculate
monetary growth ranges for M2 and M3 consistent with its price stability
objective but does not believe that these are a reliable guide to policy.
The Fed carries out its policy through open market operations that seek
to keep the Federal funds rate of interest — the interest rate that depository
institutions pay when they borrow reserves overnight to meet reserve
requirements. The reserve requirements are set to help the Fed control liquidity
within the system but the ratios are seldom changed and are not used
as a way of attempting to control the money supply. The Fed made halfhearted
attempts to influence reserves in the 1970s and early 1980s (firstly
through establishing a target range for the Fed funds rate, allowing for variations
in the interest rate; and secondly by targeting non-borrowed and then
borrowed reserves). However, these did not succeed in making the money
supply exogenous. There is no doubt that the money supply is now endogenous.
Borrowed reserves are borrowings through the discount window,
through which the Fed lends to banks as lender of last resort. The discount
rate is usually kept below the Fed funds rate, but banks are discouraged
from borrowing in this way except in emergencies.
The Fed is certainly politically independent but has in place a number of
features that make it relatively accountable to the political system.
However, the extent to which it can be said to independent of the financial
sector is open to doubt. The recent performance of the Fed also raises questions
regarding the extent to which it succeeds in looking ahead and adjusting
interest rates sufficiently early to control problems that are developing
in the economy.