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Monetary policy inertia and recent Fed actions

Author

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  • Glenn D. Rudebusch

Abstract

In the latest episode of monetary tightening in the United States, the Federal Open Market Committee (FOMC), which sets U.S. monetary policy, raised the target level of its key policy interest rate, the federal funds rate, from 1% in June 2004 to 5-1/4% in June 2006. This gradual increase was accomplished via a sequence of 17 consecutive 25-basis-point increases at successive FOMC meetings. This slow, steady two-year adjustment of the policy rate can be given two different interpretations. One of these is that the gradual nature of the policy adjustment reflected a slow internal response by the FOMC, which knew where it was going and how fast it wanted to get there and simply took its time in raising the funds rate to the desired level. The other interpretation is that the final level and the speed of adjustment to that level were not known for sure in advance, so the gradual nature of the policy rate adjustment importantly reflected economic developments and data released during the tightening. Based on the research summarized in Rudebusch (2006), this Economic Letter describes these two interpretations and assesses their relative importance in accounting for recent monetary policy actions.

Suggested Citation

  • Glenn D. Rudebusch, 2007. "Monetary policy inertia and recent Fed actions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan26.
  • Handle: RePEc:fip:fedfel:y:2007:i:jan26:n:2007-03
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    Cited by:

    1. Daniel L. Thornton, 2012. "How did we get to inflation targeting and where do we need to go to now? a perspective from the U.S. experience," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 65-81.
    2. Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
    3. Goodhart, Charles & Bin Lim, Wen, 2008. "Interest rate forecasts: a pathology," LSE Research Online Documents on Economics 24431, London School of Economics and Political Science, LSE Library.
    4. Daniel L. Thornton, 2009. "How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience," Working Papers 2009-038, Federal Reserve Bank of St. Louis.

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    Keywords

    Monetary policy;

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