Despite the fact that monetary targets have gradually become more prominent in Federal Reserve statements, the Open Market Committee has never really abandoned its preoccupation with short-run changes in money market rates. Over the years, it has justified the latter concern by arguing that financial markets are fragile and unstable, and need to be cushioned from the shocks of rapid changes in short-term interest rates.

The basic flaw in interest rate targeting is that the open market operations required to counteract an unwanted change in federal funds rates directly change the money supply. The monetary control procedures of the 1970s were major factors in the worldwide price explosion of 1974 and the subsequent recession of 1974-75, and created exchange rate pressures that caused the breakdown of the Bretton Woods fixed exchange rate system.

In October 1979, the Fed announced a new procedure to curb the expansion of money and bank credit: The manager of the Open Market Account would supply or withdraw specific quantities of bank reserves, using movements in funds rates to check projections of the supply of nonborrowed reserves. It is difficult, however, to see how the Desk can tell whether such rate changes reflect errors in reserve supply projections or unanticipated changes in credit demands or supplies. Accidental accommodation of the latter will produce procyclical changes in monetary aggregates. And, in fact, 1980 saw extraordinarily large fluctuations in both money growth and interest rates.

Changes in funds rates still trigger open market operations. Inflation, economic instability and high, volatile interest rates will continue until central banks stop trying to control interest rates.