[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Internet Connection
THE BEIGE BOOK
The summary of economic conditions prepared for each meeting
of the FOMC is published in what is known as the Beige
Book. You can see the latest Beige Book at the Fed’s Web site
by going to www.federalreserve.gov/fomc/beigebook/2005/
(changing the year in the URL as appropriate).
rate, borrowing will become more costly: the real cost of auto loans, mortgage interest
rates, and commercial loans to firms will increase. As credit becomes more costly,
households and firms will scale back their spending plans.
Because changes in the funds rate affect the entire range of market interest
rates, we simplified the discussion in previous chapters by assuming that the Fed
sets the level of nominal interest rates. In Chapter 32, we learned that other approaches
to implementing monetary policy are also used. For example, between 1979 and 1985,
the Fed often focused more closely on various measures of the money supply than
on the funds rate. Since 1985, however, setting a target for the funds rate has been
the Fed’s main tool of monetary policy. Chapter 32 explained how the Fed influences
interest rates; what we need to examine now is why the Fed decides to raise or lower
market interest rates. And to do that, we must examine the goals of monetary policy.
Case in Point
ANNOUNCING THE FED’S DECISIONS
After each FOMC meeting, any policy decisions are conveyed to the Federal Reserve
Bank of New York for implementation. In recent years, these directives have specified
the average value for the federal funds rate that the FOMC believes is consistent
with its policy objectives. The FOMC also issues a press release that summarizes
any policy actions taken during the meeting and offers an assessment of economic
conditions. For example, the press release of August 10, 2004, begins
The Federal Open Market Committee decided today to raise its target for the federal
funds rate by 25 basis points [i.e., 1/4 of a percentage point] to 1-1/2 percent.
The Committee believes that, even after this action, the stance of monetary policy
remains accommodative and, coupled with robust underlying growth in productivity,
is providing ongoing support to economic activity. In recent months, output growth
has moderated and the pace of improvement in labor market conditions has slowed.
This softness likely owes importantly to the substantial rise in energy prices. The
economy nevertheless appears poised to resume a stronger pace of expansion going
forward. Inflation has been somewhat elevated this year, though a portion of the rise
in prices seems to reflect transitory factors.
738 ∂ CHAPTER 33 THE ROLE OF MACROECONOMIC POLICY