TAILIEUCHUNG - THE ROLE OF INTEREST RATES IN FEDERAL RESERVE POLICYMAKING

The case for a rise can be put quite simply. An early increase in Bank Rate makes it more likely that the inflation target can be met in two to three years time because it allows for greater subsequent flexibility. If inflationary pressures subsequently prove more severe than the central part of our forecast suggests, then it will be a help to have started to raise interest rates earlier. But if they prove less strong then subsequent increases can be slower than would otherwise be the case. Indeed, if the economy is extremely weak, interest rates can be. | The Role of Interest Rates in Federal Reserve Policymaking Benjamin M. Friedman Frank Morris was an exemplar of public service American-style. More specifically he represented the best of what public service at the Federal Reserve System is all about. Perhaps not incidentally and here I write from my own personal experience of the man Frank was a fine human being with whom and for whom to work. Simply put I admired him enormously. Looking back I still do. Personal qualities aside Frank Morris s service at the Federal Reserve was unusual in at least two important ways. First Frank was president of the Federal Reserve Bank of Boston and therefore a regular participant albeit not always a voting member in the deliberations of the Federal Open Market Committee for fully twenty years. Since World War II only one other person has served on the FOMC for so long a span of time. Governor J. L. Robertson served as a Member of the Board from 1952 to 1973. Second as the discussion below will emphasize the particular twenty-year period during which Frank served in this capacity saw an unusually large number of changes in the Federal Reserve s conduct of monetary policy changes that reflected not only the evolution of external economic circumstances but also substantive shifts in fundamental thinking about how monetary policy works and what this implies for the central bank. Frank responded to the challenges that this unusual time presented with intelligence good judgment and a degree of interest and energy that bordered on gusto. At the very outset of his FOMC service he served as a member of the committee s Subcommittee on the Directive often William Joseph Maier Professor of Political Economy Harvard University. The author is grateful to Normand Bernard Edward Ettin Donald Kohn and Kenneth Kuttner for helpful discussions and to the Harvard Program for Financial Research for research support. 44 Benjamin M. Friedman called the Maisel committee after Governor Sherman Maisel who

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