ABSTRACT
The Fed was thrust into the limelight in the intervening years when the public came to associate it with inflation-fighting policy actions that raised interest rates and weakened economic activity. Monetary economists and central bankers alike now understand that effective monetary policy must be built on a consistent commitment to low inflation. A permanent national commitment to price stability requires that citizens personally unfamiliar with the trauma of high inflation understand the rationale for price stability and the tactical policy actions needed to maintain it. The main problem was confusion within the economics profession about the determination of the general price level and the control of inflation in a regime of inconvertible paper money. A central bank such as the Fed that is charged with conducting monetary policy on a discretionary basis is naturally inclined to give considerable weight to the public’s mood.
