Interest rates and the conduct of monetary policy

The paper describes key aspects of actual Federal Reserve interest rate targeting procedures and addresses a number of issues in light of these stylized facts. It reviews the connection between rate smoothing and price level trend-stationarity. It critiques interest rate targeting as inflation tax smoothing. It argues that stabilization policy implemented by interest rate targeting may inadvertently induce martingale-like behavior in nominal rates and inflation. The paper explains why central bankers prefer continuity of the short rate and indirect rate targeting. Lastly, it surveys empirical evidence of the Fed's influence over short-term interest rates.