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It analyzes M2 deviations from its target midpoint against interest-rate changes, explains the 1985–1989 target range reductions, and discusses how borrowing targets at the discount window were adjusted in relation to M2 signals. The review also addresses why leaving M2 targets unchanged can still support disinflation.",{"@graph":69,"@context":122},[70,84,105],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/monetary-policy-and-the-m2-target-the-m2-target-as-a-short-term-guide/324369/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/monetary-policy-and-the-m2-target-the-m2-target-as-a-short-term-guide/324369.png","ImageObject",300,407,{"name":92,"@type":93},"Theodora","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-30","2026-09-21",true,{"@type":102,"interactionType":103,"userInteractionCount":46},"InteractionCounter",{"@type":104},"ViewAction",{"@type":106,"mainEntity":107},"FAQPage",[108,114,118],{"name":109,"@type":110,"acceptedAnswer":111},"How did the Federal Reserve use M2 targets in the near term?","Question",{"text":112,"@type":113},"The Federal Reserve did not rely solely on M2 targets for near-term policy guidance; emphasis varied as policymakers responded to inflation concerns and changes in money demand predictability.","Answer",{"name":115,"@type":110,"acceptedAnswer":116},"What does deviation of M2 from the target midpoint indicate?",{"text":117,"@type":113},"For much of the last five years, deviations of M2 from the midpoint acted as a contrary indicator of policy actions, based on comparisons with movements in the federal funds rate and the discount rate.",{"name":119,"@type":110,"acceptedAnswer":120},"Why did the FOMC ease policy in the summer of 1989?",{"text":121,"@type":113},"The easing was attributed partly to slow growth in the monetary aggregates, with reference to unusual strength or weakness of M2 relative to announced ranges influencing policy decisions.","https://schema.org",{"og:url":83,"og:type":124,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":126,"canonical":83},"index,follow",{"doc_id":128,"site_id":62},324369,1790471934,{"code":4,"msg":5,"data":131},{"doc_id":128,"user_id":132,"nickname":92,"user_avatar":133,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":134,"file_id":135,"file_url":136,"file_type":137,"file_size":138,"view_count":46,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":24,"language":139,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":140,"faqs":141,"seo_title":142,"seo_description":67,"update_tm":143,"read_time":144,"preview_page_count":4},687197207919,"https://ap-avatar.wpscdn.com/avatar/a000253d6f5f7c60be?x-image-process=image/resize,m_fixed,w_180,h_180&k=1779446848396160552","by Susan A.Black andWilliam T.Gavin  \nH  \nistoricallythe monetary targetshave been used both as a way to signalintentions about long-term policy goalsand as a guide for short-term policy ac-tions.The Federal Reserve has neverrelied solely on the monetary targets toguide policy in the near term,however.The amount of emphasis has varied,firstrising as policymakers became moreconcemed about inflation and later fall-ing as evidence mounted that moneydemand was becoming unpredictable.  \nFrom late 1984 until the summer of1989,M2 was the Federal Reserve'sprimary monetary target,but apparent-ly little attention was paid to it as anear-term guide for policy.M2 targetsmay still be important,however,as asignal of long-term policy intentions.  \nIn 1985 and 1986,the Federal Reserveset a target range for M2 of 6 to 9 per-cent.The target range was loweredeach succeeding year until July 1989,when the preliminary targets werechosen for 1990(see table 1).Membersof the Federal Open Market Committee(FOMC),the central bank's policymak-ing arm,have often referred to thisdeliberate lowering of the monetary tar-get ranges as a signal of the FederalReserve's long-term policy objective togradually lower inflation.  \nThis Economic Commentary reviewsthe use of the M2 target in recent yearsand discusses the long-term stance ofmonetary policy in 1989.We also ex-plain why leaving the target for M2  \n# Monetary Policy and the M2 Target\n\nunchanged for the coming year maystill be consistent with continued disin-flation.  \n## ■ The M2 Target as\n\na Short-Term Guide  \nThe short-term effect of monetary pol-icy depends importantly on economicconditions.Because information abouteconomic conditions,including thestatus of policy goal variables,typical-ly arrives with a lag,policymakers usetargets and indicators to help them ad-just policy in the near term.In the early1980s,the Federal Reserve relied heav-ily on monetary targets to guide policy.  \nSince 1984,the FOMC has not placedstrong reliance on monetary targets asearly waning signals about when tochange its policy stance.In fact,thedeviation of M2 from the midpoint ofits target range has been a contrary in-dicator of policy actions for most of thelast five years.  \nFigure 1 shows the monthly deviationsof M2 from the midpoint of its targetrange,plotted with the monthly changesin the federal funds rate and the dis-count rate.²M2grew very rapidly:8.9percent in 1985 and 9.4 percent in1986.The aggregate was wellabove themidpoint of its target range throughout1985 and 1986,yet the federal fundsrate and the discount rate declinedthroughout the period.  \nIn 1987 and 1988,the patterns werereversed.M2 growth slowed to 4.0 per-  \nDecember 1,1989  \nAs1989 comes to an end,the levels ofnominal GNP and the M2 aggregateseem to be in balance,as M2 growthhas slowed to a4to 5 percent rangein the past three years.The FederalReserve's tentative target range forM2 growth in 1990 permits ample op-portunity for the inflation rate todecline in the next few years.  \ncent in 1987 and grew 5.2 percent in1988.M2 was below the midpoint ofits target range in these years,yet thefederal funds rate and the discount raterose steadily.  \nSince 1982,the official target for openmarket operations has been the level ofseasonal plus adjustment borrowing bybanks at the discount window.At agiven discount rate,the lower the bor-rowing targetthe easier the monetarypolicy.Again,except for some techni-cal adjustments in 1985,the relation-ship between changes in the borrowingtarget and deviations of M2 from itsmidpoint shows that the FederalReserve did not base its policy actionssolely on the M2 target.The borrowingtarget was generally lowered when M2was indicating rapid monetary expan-sion,and it was raised when M2 wasgrowing below the midpoint of its tar-get range.  \nFIGURE1  \nSOURCE:Board of Govemors of the Federal Reserve System.  \n\n| TABLE1   |  M2 TARGETS AND GROWTH RATES(Percent)   |  |  |  |  |\n| --- | --- | --- | --- | --- | --- |\n| Year   | Target  \u003Cb","cbCaij8Tj7Pz3fwj","https://ap.wps.com/l/cbCaij8Tj7Pz3fwj","pdf",1046237,"English","# Monetary Policy and the M2 Target\n## The M2 Target as a Short-Term Guide","[{\"question\":\"How did the Federal Reserve use M2 targets in the near term?\",\"answer\":\"The Federal Reserve did not rely solely on M2 targets for near-term policy guidance; emphasis varied as policymakers responded to inflation concerns and changes in money demand predictability.\"},{\"question\":\"What does deviation of M2 from the target midpoint indicate?\",\"answer\":\"For much of the last five years, deviations of M2 from the midpoint acted as a contrary indicator of policy actions, based on comparisons with movements in the federal funds rate and the discount rate.\"},{\"question\":\"Why did the FOMC ease policy in the summer of 1989?\",\"answer\":\"The easing was attributed partly to slow growth in the monetary aggregates, with reference to unusual strength or weakness of M2 relative to announced ranges influencing policy decisions.\"}]","Monetary Policy and the M2 Target - The M2 Target as a Short-Term Guide | PDF",1789967736,13]