ABSTRACT
Although many forces affect individual prices in the short run, the historical record shows that in the long run changes in the general level of prices, i.e., inflation, have been linked systematically to changes in the quantity of money. The Federal Reserve uses as its principal monetary policy target an overnight inter-bank interest rate, the federal funds rate, which it manipulates by open market operations that change its portfolio of government securities, which in turn influences monetary growth. Economists both inside and outside the Federal Reserve monitor a wide range of indicators so as to judge the appropriateness of a monetary policy target relative to the goals of achieving a stable price level and sustained real growth. An environment of credible price stability has a high payoff in a market economy.
