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Chicago Fed Letter, No. 151, March 2000
Forecasting Inflation with a Lot of Data

As specified in the 1977 amendment to the Federal Reserve Act of 1913, the Federal Reserve System and the Federal Open Market Committee (FOMC) should conduct monetary policy to promote the goals of maximum employment and output and to promote stable prices. Of these goals many people believe that the primary focus should be on achieving price stability. A stable price level means that prices of goods are undistorted by inflation and so can serve as clearer signals to promote the efficient allocation of resources and the maximum possible sustainable level of employment. It is also believed that a stable price level encourages saving and capital accumulation because it prevents asset values from being eroded by unanticipated inflation. This should contribute to the first two goals.

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