Interest rates and exchange rates under the Fed's new operating procedure: the uneasy marriage
Movements in the trade-weighted value of the dollar have exhibited a greatly increased sensitivity to movements in U.S. short-term interest rates since the adoption of the Federal Reserve's new monetary policy operating procedure on October 6,1979 (see chart). On that date, the Federal Reserve (Fed) changed its procedure to a system of so-called "reserve targeting" whereby it attempts to hit a target level of bank reserves estimated to be consistent with the desired level of the money stock.' Previous to that date the Fed had attempted to keep the federal funds rate within a targeted range believed consistent with the money stock's desired level.
