A Federal Reserve reaction function featured here predicts the actual path of the funds rate during most of the period from 1979 to 1997. The estimated function indicates that the Fed has been forward-looking, responding both to actual inflation and to the expected change in its future direction as evidenced by the behavior of the bond rate. In other words, Fed policy has been preemptive since 1979. The results also indicate that the reaction function has not changed much between the Volcker and Greenspan periods.

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