THE JOURNAL OF FINANCE • VOL. XXXVI. NO. 2 • MAY 1981 CURRENT MONETARY POLICY RESEARCH AT THE FEDERAL RESERVE BOARD The Impact of Uncertainty on the Feasibility of Humphrey-Hawkins Objectives p. TINSLEY, J. BERRY, G. FRIES, B. GARRETT, A. NORMAN, P. A. V. B. SWAMY, and P. VON ZUR MUEHLEN* I. Introduction^ "I know not of aught in the world that so profits a man as taking good counsel with himself; for even if things fall out agaiitst one's hopes, still one has counselled well, though fortune has made the counsel of no effect: whereas if a man counsels ill and luck foUows, he has gotten a windfall, but his counsel is none the less silly." Herodotus ([7], p. 500.) A STOCHASTIC FRAMEWORK for Coordination of macroeconomic policies is introduced in this paper. It is suggested that: (i) measures of policy accountahility should allow for the climate of uncertainty that surrounds policy decisions, and (ii) most models of aggregate economic activity impose arhitrary specifications of uncertainty that do not appear to be empirically justifiable. Ambiguities in interpreting the Humphrey-Hawkins reports of policy authorities are sketched in section II; a proposal for maximizing the ex ante prospects of policy objectives is illustrated in section III; finally, nonstationary allocations of uncertainty are discussed in sections IV and V. II. The Humphrey-Hawkins Policy Dialogue Two purposes of the Humphrey-Hawkins law, passed in late 1978, were to (i) "set forth explicit short-term (two-year horizon) and medium-term (five-year horizon) economic goals" and (ii) "improve the coordination of economic policymaking within the Federal Government" to attain these objectives [3]. Under provisions of the law, economic goals are provided in the Annual Report of the Council of Economic Advisers, and the Board of Governors of the Federal Reserve must respond with semi-annual reports on its "objectives and plans... with respect to the ranges of growth or diminution of the monetary and credit aggregates for the calendar year... and the relationship of the aforesaid objectives and plans to the short-term goals..." [3]. * Federal Reserve Board, Washington, D.C. ' This paper provides an overview of recent work by members of the Special Studies section on the role of uncertainty in policy forecasts and is based on work described in the papers [8], [9], [10], [13], and subsequent work. We are grateful for the computations of S. Schloss and the typing of V. Watkins. Opinions expressed in this paper are those of the authors and do not reflect the views of the Board of Governors or the staff of the Federal Reserve System. 489