Having considered the Fed’s pre-crisis approach to monetary control, with its emphasis on interest-rate targets reached with the help of open-market operations, we must now come to grips with the quite different methods it has been employing since, and how the switch to them came about.
The story of that switch must surely rank among the great tragicomedies of monetary history, for despite what many Fed officials have suggested, the Fed wasn’t forced to abandon conventional interest rate targeting for reasons entirely beyond its control. Instead, it was compelled to give-up old-fashioned rate targeting in part because of its own, obstinate refusal to practice such targeting responsibly.
Explaining what happened isn’t easy, so brace up!