New policy tools, which helped the Federal Reserve respond to the financial crisis and Great Recession, are likely to remain useful in dealing with future downturns.
Sentiment: POSITIVE
Beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns.
Stronger productivity growth would tend to raise the average level of interest rates and, therefore, would provide the Federal Reserve with greater scope to ease monetary policy in the event of a recession.
The greatest economic power might in fact remain in the hands of the Federal Reserve. Economists credit the Fed's policy of keeping interest rates at historic lows with helping to pump up the economy and bring unemployment down.
A wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy. For example, steps could be taken to increase the effectiveness of the automatic stabilizers, and some economists have proposed that greater fiscal support could be usefully provided to state and local governments during recessions.
We need financial regulation that allows businesses and the banks they use to have access to the tools that help keep prices of consumer goods - like groceries and home heating oil - steady, while ensuring that the taxpayers are never again on the hook for the types of wild bets that helped crash the economy in 2008.
When there's downward pressure on growth, one choice is to adjust economic policy, increase deficits, relax monetary policy. That might have a short-term benefit, but may not be beneficial for the future.
The Federal Reserve, like other central banks, wields powerful tools; democratic accountability requires that the public be able to see how and for what purposes those tools are being used.
The Fed's ability to raise and lower short-term interest rates is its primary control over the economy.
Every time there is a recession, consumers will typically be more cautious, more conservative, take more time, and make more serious price-performance trade-offs.
The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy.
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