The FOMC in 1979: Introducing Reserve Targeting

Abstract

~'IAJORchanges in the implementation of monetary policy occurred in 1979.In accordance with the Full-Employment and Balanced Growth Act of 1978, the Federal Open Market Committee (FOMC) was required to announce long-run ranges for monetary growth in 1979 in a new format.In addition, the FOMC had to adjust its one-year range for Ml growth to take into account the introduction of two financial innovations in late 1978 -the automatic transfer service (ATS) between savings and checking accounts at banks nationwide and negotiable orders of withdrawal (NOW) accounts in New York State.The most important change in the implementation of monetary policy, however, occurred in the FOMC's short-mn operating procedures.On October 6, 1979, the Federal Reserve announced a series of actions to "assure better control over the expansion of money and bank credit, help curb speculative excesses in financial, foreign exchange, and commodity markets, and thereby serve to dampen inflationary forces," 1 The most significant of these actions was the FOMC's approval of a change in the day-to-day procedures used to conduct monetary policy.This action involves placing greater emphasis in day-to-day operations on the supply of bank reserves and less emphasis on confining short-term fluctuations in the federal funds rate.2This announcement introduced a different strategy for the conduct of open market operationsa strategy of targeting on bank reserves rather than the federal funds rate.Note: Unless specified otherwise, citations throughout thi 5 paper are from either the "Record of Policy Actions of the Federal Open Market Committee" or "Statements to Congress," Federal Reserve Bnlletjn (February 1979 through March 1980).

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