Economic Report of the President

Reserve provides some flexibility in the face of such temporary disturbances,even with unchanged annual monetary targets.ConclusionsOne of the major lessons that emerges repeatedly in the precedingdiscussion is the need for understanding, by the public generally andthe financial community in particular, of the complexities of monetarypolicy. Monetary targeting provides an invaluable tool to increasemonetary discipline, to communicate Federal Reserve intentions,and to evaluate performance. But the advantages of a semiautomaticrule to guide the monetary authorities are not absolute. Ina world where economic and financial markets are subject to majorand unpredictable changes, deviations from the Federal Reserve's announcedintention to reduce steadily the annual target ranges maysometimes be necessary. Targets, once set, may occasionally have tobe modified. And allowing short-run deviations of actual from targetedmoney growth may be called for if care is taken not to let thempersist. But if the public interprets occasional necessary changes inthe longer-run monetary target ranges, or short-run deviations ofactual money growth from those targets, as evidence that the FederalReserve has lessened its determination to fight inflation, the monetaryauthorities will be put in an untenable position. If they fail tomake the adjustment in the monetary targets that is called for by amajor change in economic circumstances, or if they attempt to avoidall short-run deviations of actual from targeted money growth, monetarypolicy may produce unwanted results. If, on the other hand, theydo change the targets or allow temporary deviations, their actions maybe misunderstood by the public and their credibility consequentlyimpaired. The monetary authorities will face this problem once againin 1981, as is discussed in Chapter 3.INCOMES POLICIESEven if they are followed with persistence and acquire a credibilitythat favorably affects expectations, monetary and fiscal restraints arelikely to reduce inflation only slowly and at significant cost in lostoutput and employment. Incomes policies attempt to lower thesecosts. By directly influencing the setting of wages and prices, incomespolicies seek to decrease the inflation and increase the growth ofoutput and employment that result from any given degree of demandrestraint. A tight monetary target, for example, is compatible eitherwith a small reduction in inflation and zero economic growth or alarger reduction in inflation and positive economic growth. By persuadingworkers and employers to accept lower pay and price in-57