Question

Do you think the Fed has enough monetary policy space to respond to another financial crisis using conventional tools? Explain. If not, what should the Fed do?

Answer 1

Fed has already spent around $4 trillion since 2008 subprime crisis. This amount is more than worlds largest economies. USA fiscal deficit has also increased to 17 % in 2018. All these investments has impacted positively so far for USA economy. Inflation rate is below 2% and unemployment is below 4%.

it is clear that Fed has a limited monetary policy application if recession strikes again. Debts will be higher, credit ratings will go down and again world economy will have recession which will affect world economies in circular manner.

Fed should guide govt. about controlling fiscal deficit now to have better future preparedness. They can also have contractionary monetary policy now. If consumer confidence boosts then that will be best for USA economy and Fed should work as recession is not a threat and focus on macroeconomic management with strict credit policies. They can use govt. bonds to control liquidity.