Keywords: Federal Reserve, FOMC, Paul Volcker, monetary reform, operating procedures.
Abstract: This study offers a historical review of the monetary policy reform of October 6, 1979,
and discusses the influences behind it and its significance. We lay out the record from the
start of 1979 through the spring of 1980, relying almost exclusively upon
contemporaneous sources, including the recently released transcripts of Federal Open
Market Committee (FOMC) meetings during 1979. We then present and discuss in detail
the reasons for the FOMC's adoption of the reform and the communications challenge
presented to the Committee during this period. Further, we examine whether the
essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned
Keynesianism, nominal income targeting, and inflation targeting. The record
suggests that the reform was adopted when the FOMC became convinced that its earlier
gradualist strategy using finely tuned interest rate moves had proved inadequate for
fighting inflation and reversing inflation expectations. The new plan had to break
dramatically with established practice, allow for the possibility of substantial increases in
short-term interest rates, yet be politically acceptable, and convince financial markets
participants that it would be effective. The new operating procedures were also adopted
for the pragmatic reason that they would likely succeed.
Full paper (531 KB PDF)
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Last update: January 5, 2005