What Monetary Policy Can and Cannot Do - by Jerry L. Jordan

Sep 21, 2026

Explains how focusing on operational details of monetary policy can obscure long-term goals and deepen confusion between money and credit. Uses the America’s Cup as an analogy for communication: technical actions or limited viewpoints fail to reveal true progress toward the policy outcome. Restates core principles dating back to Henry Thornton and highlights limitations identified by Milton Friedman, emphasizing that monetary policy shapes the economic environment rather than directly producing real goods, services, or employment. Then introduces the Phillips curve illusion to clarify public misconceptions about inflation and output.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Principles Underlying Monetary Policy

Limits of Monetary Policy

The Phillips Curve Illusion

# What Monetary PolicyCan and Cannot Do by Jerry L.Jordan 0 ne of the peculiar aspects of my re-tum to the monetary policymaking arenahas been the media's interest in labelingme a "hawk"or "dove,"or someone whois anti-inflation or pro-growth.I regular-ly receive calls from reporters when eco-nomic statistics are released askingabout my reactions to the numbers so thatthey can speculate on how Imight voteat the next Federal Open Market Com-mittee meeting.“Fedwatchers”—afraternity Ionce belonged to—othermarket participants,and the mediahave increasingly focused on interpret-ing policymakers'actions and on theminutiae of implementing policy.Thisfocus has contributed to confusionabout what monetary policy can andcannot do and has added to the age-oldconfusion between money and credit. Tonight I will argue that this obsessionwith the details of implementing policyhas detracted from long-term policygoalsI wil present my views on theessential principles underlying monetary policy and describe what monetarypolicy can and cannot achieve.Finally,I will give my prescription for what acentral bank should focus on. The America's Cup trials,currentlyunder way in San Diego Bay,can serveto illustrate the problem of communi-cating the logic behind monetary policyformulation and implementation.If youhave had the opportunity to watch thetelevision coverage of this preeminentsailing race,you know that it is ratherdifficult to discern how a yacht is doingrelative to the finish line because itsbow is almost never pointing towardthe ultimate destination,or even towardthe next buoy. Television viewers most often aregiven two vantage points of the race:One camera,affixed to the mast,isfocused on the actions of the crewand the captain.Watching the opera-tions of the crew provides no infor-mation about the boat's progressalong the course of the race.For that,we must go to a camera located in ablimp high aboveBut even wellabove the fray,the course of the raceis difficult to follow,and the progresstoward the finish line may appear tobe unclear.Depending on the wind,the boats will be tacking first in onedirection and then in another.Thetelevision commentator helps bydrawing lines on the screen that markthe course line,the relative positionof the boats,and the ultimate destina-tion.The helmsmen exercise a consid-erable amount of judgment,whileabiding by age-old principles of sail-ing,to reach the finish line. May 15.1992 In a recent speech,Jerry L.Jordan,the new president of the Federal Re-serve Bankof Cleveland,laid out hisviews on the essential principles under-lying monetary policy,described whatmonetary policy can and cannot accom-plish,and discussed what a centralbank's primary focus should be.ThisEconomic Commentary is based onPresident Jordan's address. ## ■ Principles UnderlyingMonetary Policy The implementation of monetary policyactions has much in common with sailing.Just as watching the crew adjust the sailsprovides little infomation about a boat'sdestination,the technicalities surroundingthe monetary policy process provide fewclues about the outcome.And just as theprinciples of sailing go back to the timeofthe Vikings,the principles of monetarypolicy date back at least to Henry Thom-ton in the early nineteenth century.Thom-ton,an English banker and economist,recognized and clearly articulated thedangers associated with a volatile moneysupply.In particular,he linked changes inthe supply of available money and creditto the general price level.Leading schol-ars,including Milton Friedman,haveperiodically restated these basic princi-ples,which unfortunately are often over-looked or perhaps forgotten by some Fed-watchers and financial journalists. In 1967,Milton Friedman,in his Presi-dential Address to the American Eco-nomic Association,presented acleardescription of the role of monetary pol-icy.He began by reminding his audienceabout the limitations of monetary policy;that is,it cannot be used to produce realgoods and services or

FAQs

Why does the media’s “hawk” vs. “dove” labeling create confusion about monetary policy?

Because it shifts attention to how policymakers implement actions and to minute operational details, making it harder to understand what monetary policy can and cannot achieve toward long-run goals.

What are the main limitations of monetary policy according to the text?

It cannot be used to produce real goods and services or to create employment, and it cannot peg either the real interest rate or the unemployment rate; instead, it creates an environment for the economy to operate efficiently.

Why is the Phillips curve described as an illusion?

The positive short-run correlation is linked to how the relationship was constructed using data and replaced nominal wage changes with general inflation, even though the underlying logic depends on expectations and historical inflation patterns.

Sep 21, 2026

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