The Evolution of Monetary Policy and the Federal Reserve System over the Past Thirty Years: An Overview

Article excerpt

Over the past thirty years, the activities of the Federal Reserve System have undergone major change. Public interest and confidence in monetary policy have grown immensely. Low inflation has emerged, if not as the primary objective of monetary policy, at least as a more central focus than it was thirty years ago. The Federal Reserve System has also undergone changes. Reserve Banks now charge for many of their financial services, rather than providing them free to banks that are System members. Placed in competition with commercial banks in providing financial services, Reserve Banks have striven to be more efficient, more responsive, and more innovative. At the same time, Reserve Banks have played increasingly active and increasingly visible roles in their communities and their Districts, providing economic expertise and civic leadership.

Frank E. Morris, President of the Federal Reserve Bank of Boston from 1968 to 1988, was a key contributor to all these developments. The year after he took office, the Boston Fed sponsored a conference on "Controlling Monetary Aggregates," at which the role of the monetary aggregates in the conduct of monetary policy was vigorously debated. This was the first of a series of conferences on important public policy issues that continues to this day.

Frank was also a champion of regional research and of the Reserve Banks using their expertise to contribute to the economic well-being of their Districts. In the mid 1970s, Frank and the Boston Bank played a leadership role in helping the Commonwealth of Massachusetts resolve a critical financial crisis, by providing credible analysis of the state's economic and fiscal situation to the financial community. Later, Frank became very active in local employment and training policy and in trying to improve the schools in the City of Boston.

Under Frank, the Boston Fed was also very influential in the development of the payments process. A Bank conference in 1974 broached the possibility of charging for financial services. The conference and subsequent work shaped the thinking of one of the Bank's directors, William Miller. When Miller became Chairman of the Board of the Federal Reserve System, he was a strong supporter of the concept and instrumental in passage of the Monetary Control Act of 1980, which required the Fed to price its services.

Frank made many other important contributions to the Federal Reserve Bank of Boston and the Federal Reserve System. However, his influence was felt most strongly in the conduct of monetary policy, in the evolution of the payments system, and in shaping the role that Reserve Banks play in their regions. Accordingly, this conference focused on these three areas and on the developments that have occurred since Frank became president of the Boston Fed in 1968 and the prospects and challenges ahead. Three sessions addressed issues in monetary policy, and one each tackled payments and the role of the regional Banks.

A theme that emerges from this conference is the importance of the Federal Reserve System communicating clearly and repeatedly its commitment to a low rate of inflation. In the early 1970s, the conduct of monetary policy was shaped by a plethora of objectives and concerns. Many economists questioned whether monetary policy should place much weight on inflation, as compared to low unemployment, or even whether monetary policy could affect inflation. Today, no one doubts that monetary policy can affect inflation.

The current emphasis on low inflation does not mean that other objectives are ignored. While some central banks have adopted formal rules limiting inflation, the Federal Reserve's past success in combating inflation and its forceful communication of its commitment to low inflation have given it the best of both worlds. The public seems persuaded that inflation will remain low, while the Fed retains the flexibility to respond to economic conditions, including a softer economy, as seems fit. …