The New Procedure

E.J. Stevens discusses the new procedure introduced by the Federal Reserve in October 1979 to achieve money-growth objectives, focusing on the supply of nonborrowed reserves. Weekly nonborrowed-reserve objectives accommodate expected seasonal and some offsetting week-to-week variations in the demand for money. Otherwise off-target money growth is accommodated only through the discount window, with consequent repercussions on the federal-funds rate and other rates. Persistent deviations of money from target automatically cause interest-rate movements that tend to counteract the deviations, reinforced or dampened by discretionary adjustments in the nonborrowed-reserve objective and the discount rate. Experience with the new procedure in 1980-81 demonstrates the willingness of the Federal Open Market Committee to tolerate substantial interest-rate variations to achieve noninflationary money growth.