Question

In your opinion, did the Fed do the right thing to stabilize prices (contain inflation) by its actions in 1999/2000 or, in the paraphrased words of Steve Forbes, do nothing more than "make a healthy person sick just because he was too healthy" and actually cause a "crash landing" of our economic growth? In other words, did the Fed's actions actually cause the recession we experienced in 2001?

Answer 1

SOLUTION

FED'S RECESSION AND ITS CAUSES

CAUSES OF RECESSION BY FED

Yes, Fed's action actually cause the recession that we experienced in 2001 , This is because the inflation had reached 13.5 % and the federal reserve raised the interest rates and slowly the money supply growth, which slowed the economy and causes unemployment to rise. In response , the federal reserve provided liquidity and support through a range of programs motivated by a desire to improve the functioning of financial markets and institutions and limit the harm of US economy .

FED'S WAY OF STABILIZING PRICES

In my opinion, Fed did the right thing. The Fed uses its tools to stabilize the economy. When the economy is slumping , the Fed increases the supply of money to spur growth. Conversely when the inflation is threatening, Fed reduces the risk by shrinking the prices. First it aims to increase the interest rates through the central bank, when the bank increase their rates, fewer people wants to borrow money because it costs more to do so while that money accrues at the higher prices so, the spending drops, prices drops and the inflation slows.

FED'S POLICY BEING USED

To control inflation, the Fed must use Contraction  monetary policy to slow down the economic growth. The Feds action reduces the liquidity in the financial system, making it to become more expensive to get loans.

But the primary job of FED is to control inflation while avoiding a recession. by using the above method the economic growth will automatically slow down.

Therefore, in my opinion, FED did the right thing to stabilize the prices by inflation by taking steps in stabilizing the prices, the economic growth will be reduced.