ABSTRACT
In the postwar period, the ultimate objectives of the Federal Reserve—namely full employment and stable prices—have remained unchanged; however, the Fed has modified its operational and intermediate objectives for monetary policy several times in response to changes in the economic environment. The Federal Reserve and many other central banks have increasingly relied on interest rates, to the almost complete exclusion of monetary or reserve aggregates, both as sources of information for determining policy and as operating instruments for conducting policy. Besides obtaining near-term interest rate expectations, central banks also are interested in the term structure at the five- to ten-year horizon in order to get an indication of the market’s inflation expectations. Central banks are keenly aware of the importance of such inflation expectations both as inputs to forecasts of future inflation and economic activity and as measures of the credibility of the central bank’s current stance of monetary policy in achieving the long-run goal of price stability.
