| Sumario: | Part of a special report on the Federal Reserve's monetary policy. The text of a speech by a Nobel laureate and the Institute Professor of Economics at the Massachusetts Institute of Technology to the Senate Committee on Banking, Housing and Urban Affairs on July 1, 1993: In recent years, the Fed has been too focused on bringing inflation down to a very low level. In fact, the Fed is too prone to engineer or countenance higher short-term interest rates at the first signs of a healthy real recovery or at the first signs of some acceleration of price-level indexes. The Fed must distinguish between “microcaused” inflation, which is caused by one-time shocks and tax changes, and “macrocaused” inflation, which is due to diminished slack in manpower and productive capacity. The speech is accompanied by the text of the speaker's responses to questions by Sen. Donald A. Riegle and by his reflections on the Fed developments that occurred in July after his speech to the Senate.
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