Is Federal Reserve Policy Working?

This article outlines the new monetary policy consensus in the U.S. as of 2005, the assumptions underlying it, and the channels through which the U.S. Federal Reserve Board believes monetary policy works. Recent developments in mainstream economic thinking on macroeconomic and monetary phenomena have given a new impetus to the direct management of the economy. The use of monetary policy by way of manipulating the rate of interest to affect inflation is now well accepted by both academic economists and central bank practitioners. The explicit control of the money supply, which was fashionable in the 1970s and 1980s in the U.S. and elsewhere, was abandoned in favor of monetary rules that focus on interest-rate manipulation by the central bank. Several countries have adopted this new monetary policy since the early 1990s in an attempt to reduce inflation to low levels. Since then, many commentators have praised this policy framework as a superior way of conducting monetary policy. Indeed, Frederic S. Mishkin argues that countries pursuing this policy seem to have significantly reduced both the rate of inflation and inflation expectations beyond that which would likely have occurred in the absence of inflation targets.