Good question, and there’s considerable debate as to the answer. When you read the Policy Application, the answer at first seems fairly obvious, but the Fed’s policies have had mixed results. The 1990’s were a positive for Fed policies as opposed to its potential enhancement of the economic problems of the 30’s, 70’s, and early 80’s. Added to that are the three potential time lags (recognition, action, and effect) which tend to hinder the Fed’s use of its monetary tools to stimulate or slow down the economy.
It remains to be seen how positive the Fed’s use of discretionary monetary policy will be in the 21st century. The years 2008-2009 have already posed one of the biggest economic stabilization challenges the Fed has faced since the Great Depression. Only time will tell if its policies combined with the fiscal policy will be able to lift the U.S. out of a deep recession.
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