For M2,or any other measure of money to be used as an intermediate target, it must be either directly or indirectly under the control of the Fed. However, they do not have direct control over that supply. Although the conditions under which a measure of money serves as an informational variable are less demanding than in its role as an intermediate target variable (e.g., it does not have to be under the control of the Fed) its usefulness in providing information diminishes in the absence of a close relationship between it and, for example, aggregate spending. These notions can be formalized in terms of a simple equation. Economists have taken several approaches to this task. Its velocity must be stable and predictable . What such a collection of assets would be was not to be determined by logic. Nevertheless, in their studies, M2 was stable and predictably related to nominal GDP. While the Board continued to set growth rate ranges for each aggregate, it concluded in that report:
With considerable uncertainty persisting about the relationship of the monetary aggregates to spending, the behavior of the aggregates relative to their annual ranges will be of limited use in guiding policy ... and the Federal Reserve will continue to utilize a broad range of financial and economic indicators in assessing its policy stance. It involved redefining M2, redefining the opportunity cost of M2, accounting for changes in the institutional setting determining M2 velocity, and factoring in any number of changes essentially of a one time nature to account for the resolution of the thrift and banking crisis of the mid-1980s. Rule-Based Monetary Policy and the Money Supply

Suppose that a measure of money is shown to be stable and predictably related to money spending and that the Federal Reserve can, by manipulating bank reserves, control this measure of money on a timely basis. How should it conduct monetary policy? What happens if this monetary theory of business cycles is not true? Of importance is the cause of cyclical instability. The reason for using interest rates in these roles is that they are an important channel by which changes in monetary policy cause changes in spending. However, the interest rates suggested by economic theory as relevant are not the rates used by the Fed. Movements in interest rates must be read with great care if they are to provide any information about monetary policy. Consequences of Ambiguous Indicators for the Conduct of Monetary Policy

It is now widely accepted that monetary policy is a powerful tool in the short run for affecting the pace of economic activity and employment and, over the longer run, the rate of inflation. With monetary aggregates that convey little information about monetary policy and interest rates that can be equally devoid of information, those exercising oversight are left in the position of having to rely heavily on the nation's central banker as the conduit of information about and judgments on the policy that he or she is responsible for formulating and executing. Moreover, without unambiguous indicators of monetary policy, those formulating policy are more likely to rely on current developments in the economy in making their decisions on what policy should be even though the effects of that policy may be felt at some distant time, perhaps as long as two years in the future. Trying to explain what these effects have been and how to adjust to them has been part of a large and ongoing research effort involving the specification of new monetary aggregates, new measures of opportunity cost and risk, and new measures of total spending. U.S. government
2. Households. 25, No. "Do Monetary Aggregates Help Forecast Inflation?" "Monetary Aggregates and Monetary Policy in the 21 st Century." "Can Monetary Models be Fixed?"
Economic theory and history make a compelling case that monetary policy is powerful in affecting the pace of economic activity and employment in the short run and the rate of inflation in the longer run. Thus, unambiguous indicators should exist for those formulating, executing, and overseeing monetary policy. To this end, definitions of money are sought, as are collections of assets consistent with those definitions. For these measures of money—known as monetary aggregates—to be useful in a policy context, they must, at a minimum, be stable and predictably related to spending, meaning that when they are changed, the subsequent change in spending can be closely predicted. If they meet that test they can provide information about the current stance of monetary policy. Should they be under the control of the Federal Reserve (Fed), they may be useful as intermediate target variables in the execution of monetary policy.
The monetary aggregates constructed by the Fed are no longer stable and predictably related to spending, although they once may have been. A vast number of studies have sought to explain the reason for this sudden instability. Their findings highlighted efforts by financial institutions to get around federal regulations, structural changes related to economic development, the use of U.S. currency abroad, and a number of one-time events such as the thrift crisis of the mid-1980s. Accounting for these developments led to refinements of the existing aggregates, development of new aggregates, and new measures of opportunity costs. At most, this research suggests that the refined old and new aggregates can provide useful information about future income growth, employment, and inflation. Several of the aggregates, however, do not seem to be under the control of the Fed.
Were monetary aggregates to exist that were stable and predictably related to spending and under the control of the Fed, their use in the conduct of monetary policy would likely be controversial. Some economists, who see monetary instability as the major cause of business cycles, favor a rule-based policy of increasing the aggregates at a fixed percentage per year. Others, with different notions of the causes of cyclical instability, tend to favor a discretionary approach to policy and monetary fine tuning.
If ideal monetary aggregates do not exist or are not under the control of the Fed if they do exist, monetary policy can be formulated and executed in terms of interest rates. However, the relevant interest rates for household and business spending decisions are the real or inflation-adjusted rates. These rates can be affected by actions of others in the economy in addition to the Fed and by developments abroad. Thus, their movements may provide little information about monetary policy.
The oversight of monetary policy is handicapped by a lack of reliable, objective, and unambiguous monetary indicators. This leads to the unhealthy situation in which those responsible for overseeing monetary policy must rely heavily on the Fed to provide them with an assessment of policy, which may hinder an arms length assessment. This report will be updated.