Question

What changes have been made to the monetary policy to correct for the economic challenges over the past 20 years?

Answer 1

The U.S. economy has substantially strengthened over a long recovery. The unemployment rate has been steadily declining for nearly nine years and is now nearly 20 years low at 3.9 percent. They may be found by most people who want jobs. Inflation has moved up and is now close to the 2 percent target of the Federal Open Market Committee (FOMC) after running for six years generally below that level. There is good reason to expect that this strong performance will continue with solid household and business confidence, stable job creation rates, rising incomes, and arriving fiscal stimulus.

Within traditional economic models, major economic quantities such as inflation, unemployment, and gross domestic product (GDP) growth rate fluctuate around values that are considered "standard," or "natural," or "wanted." FOMC has chosen as one of these desirable values a 2 percent inflation target. The other ideals are not followed explicitly, nor can anyone select them. Rather, these values are the result of a myriad of economic interactions. Participants state their individual views on the longer-run normal values for GDP growth rate, unemployment rate, and federal funds rate in the FOMC's quarterly Summary of Economic Projections (SEP).

The Fed influences interest rates to affect interest-sensitive spending such as plant and equipment spending on business capital, consumer durables spending on households, and investment in residential property. Moreover, when interest rates diverge from country to country, it causes capital flows that affect the exchange rate between foreign currencies and the dollar, which in turn affects export and import spending. Monetary policy can be used through these channels in the short term to increase or delay aggregate investment. Monetary policy has a major impact on inflation in the long run. A low and stable inflation rate facilitates price transparency and, ultimately, sound economic decisions.

Some analysts have defended the relative autonomy of the Fed from Congress and the Administration on the grounds that it removes political pressure to make monetary policy decisions incompatible with a long-term emphasis on low inflation. Yet sovereignty limits Congress and the administration's transparency, and the President's recent criticism of the Fed has increased the que