Monetary policy in a changing world

In a speech given to the Money Marketeers in New York in September, bank president Thomas M. Hoenig offered a long-term perspective on some current and future challenges facing monetary policy due to ongoing changes in the structure of the economy and financial markets. These changes can affect monetary policy in several ways. Some complicate the process of deciding when a policy action should be taken--that is, when the FOMC should change the federal funds rate target. Others may affect the implementation of monetary policy by requiring changes in operating procedures or the institutional framework of policy.> Mr. Hoenig focused on three specific issues. The first is the apparent change in the structure of the inflation process in recent years that has made it more difficult to produce reliable inflation forecasts. This development has led to some subtle but significant changes in monetary policy decision-making. The second is the impact of a shrinking supply of Treasury securities on monetary policy, which has already affected yield spreads and the usefulness of some financial market data as indicators for monetary policy. Going forward, this development could also affect how the Fed implements policy. The third issue is the more distant prospect that the spread of e-money could undermine the role of central banks in conducting monetary policy. This prospect could ultimately affect the implementation of monetary policy in a very fundamental way by reducing or even eliminating the demand for central bank money.