The Monetary Base as an Indicator of Policy
Last Updated: 11/16/95
Some analysts use growth in the monetary base as an indicator of monetary policy and a guide to future economic activity and prices. This Fed Letter examines this practice, arguing that its validity depends on the Federal Reserve's operating procedure and the structure of reserve requirements applied against depository liabilities. This analysis suggests that the monetary base is not likely to be a very useful indicator of U.S. monetary policy.