The FOMC in 1988: Uncertainty's Effects on Monetary Policy

The FOMC in 1988: Uncertainty's Effects on Monetary PolicyURING 1988, as the economy continued in an historically long expansion, the Federal Open Market Committeehenceforth, the "Committee" -faced the task of pursuing its long-term objective of reasonable price stability, while promoting growth in output on a sustainable basis and improvements in the nation's external accounts.1 As the year began, the Committee believed that accomplishing this task was complicated by uncertainties associated with the long-term effects of the stock market crash of October 1987 and the continuing movements in the dollar, as well as the changing relation between the monetary aggregates and nominal output.In the Committee's view, these uncertainties, among others, warranted a greater degree of flexibility in the implementation of monetary policy.Otherwise, unexpected economic developments easily could drive a wedge between desired and actual outcomes.To explain the challenge faced by the Committee and the role of flexibility in meeting that challenge, this article examines the formulation of monetary policy by the Federal Open Market Committee in 1988.The discussion focuses on how changing economic conditions and the desire for greater operational flexibility influenced Committee's decisions during the year.