, brainard ( 2020 ). 8 the neutral interest rate has continued to fall and is currently at a record low level. inflation and inflation expectations have systematically undershot the fed's target of 2 per cent. prior to the pandemic, unemployment in the united states had fallen to the lowest level in 50 years without any tangible impact on inflation. it is primarily two of the changes made by the fed in its policy document that are central to my discussion here today. firstly, that monetary policy shall be aimed at inflation overshooting 2 per cent for a period of time if inflation has previously undershot 2 per cent. earlier target deviations will thus be compensated for by deviations in the other direction. 16 this is new. in conventional inflation targeting, deviations from the target are regarded as bygones, which do not need to be compensated for. in his speech at jackson hole in august, chairman jerome powell called this a “ flexible form of average inflation targeting ”. what the federal reserve is concerned about is the relationship i mentioned earlier, that is, that if inflation has not reached up to the target level on average over a long period of time, this risks sooner or later affecting the long - term inflation expectations in the economy. they therefore want to make it clear that they are endeavouring to attain an average inflation rate of 2 per cent – “ average inflation targeting ”. 17 however, they have not committed to any specific formula for calculating the mean value, for instance, over which period this will apply – hence the term “ flexible ”. the second important change refers to the view of how the labour market should affect monetary policy decisions. previously, the wording was that monetary policy was guided by deviations from maximum employment. these deviations could of course be both positive and negative. according to the new wording, decisions will in future be based on an assessment of shortfalls from maximum employment. in practice, this means that low unemployment or high employment as such will not be trigger factors for monetary policy tightening, if inflation is not on its way up. the fed is thus saying that it will not risk putting the brakes on too early in economic upturns, but will allow them to proceed longer than has perhaps been the case previously. one reason is that if a strong labour market can be retained over a longer period of time, this will benefit weaker groups, which would otherwise have problems obtaining employment. this increases total employment but, interestingly enough, distributional

the reserve bank remains concerned about the excessive rates of growth in the money supply, and remains committed to reducing this monetary stimulation of inflation during the course of 1997. recent trends in the money supply and bank credit extension beg the question, however, whether monetary policy at this juncture is restrictive enough and whether even more stringent measures may not be required to reduce overall liquidity further, which could, of course, lead to even higher interest rates and hopefully also a decline in the demand for credit. 4. other functions of the central bank restricting the functions of the central bank to the monetary objective of creating a stable overall financial environment, vests a further important responsibility with the monetary authorities, and that is to encourage and support the development of sound and well - managed banking institutions. banking institutions replace the central bank as the major supplier of money to the public, and therefore have become important conduits for the implementation of monetary policy. the south african reserve bank has therefore been vested also with the task of bank regulation and supervision. this task is becoming increasingly more difficult as banking institutions become more multi - national, and as cross - border financial operations increase. the reserve bank ’ s bank supervision department works very closely with their counterparts in many other countries to ensure that uniform, compatible and effective prudential directives are complied with by all banks operating in south africa, and also by the foreign branches and subsidiaries of south african resident banking institutions. the defined objective for monetary policy also requires of the central bank to accept some leading role in the development and administration of an efficient functioning national payments, settlement and clearing system. the reserve bank is now working with the other banking institutions to upgrade the south african payments, settlement and clearing system. provision will soon be made for real - time on - line settlement of large transactions, and for the daily netting and settlement of smaller payment transactions done through the banking system. efficient monetary policy in a market - oriented economy finally also requires well - functioning financial markets. the reserve bank therefore has a vested interest in the development of the money, capital and foreign exchange markets. in the case of the south african foreign exchange market, the reserve bank is working closely with the minister of finance gradually to phase out exchange controls, and to integrate the south african financial markets with international markets. 5. conclusion the south african experience ratifies the international experience that monetary policy should primarily be aimed at financial objectives and should at all times be used to promote overall financial stability. this is the best contribution monetary policy