What drives the Fed to act?

This paper studies the determinants of monetary policy since 1980 to see whether the Fed has truly followed an ad hoc approach, or whether some variables play a more important role in determining monetary policy than others. The results suggest that the Fed consistently responds to the unemployment rate, and that changes in the unemployment are the most important determinant of monetary policy. The results also indicate that the Fed responded, for some periods, to the real rate of return in the stock market, especially to lower the risk of financial instabilities, rather than to control asset price inflation.