The Real Rate of Interest As A Guide To Monetary Policy

The Federal Reserve, in its midyear monetary policy report to Congress, downgraded M2 as a guide to monetary policy and elevated, or seemed to elevate, the real interest rate as a guide to policy. I doubt that the real interest rate can substitute for monetary aggregates as a guide to policy, and I doubt that the Fed really believes that it can either. I will first discuss some of the well-known problems with employing the real interest rate as a guide to monetary policy and then will offer some speculations on why the Fed discussed real rates at all and on the risks of this approach