Fed Policy: Good Intentions, Risky Consequences
in this essay for the CATO Journal, Plosser argues that the last five years have been an extraordinary time for the global economy and monetary policymakers. The financial crisis and the severe global recession that followed have tested our resolve, our patience, and our economic theories. To restore the health of ailing financial markets and economies, central banks have driven short- term interest rates to essentially zero, expanded their balance sheets to unprecedented levels, and engaged in market interventions that have blurred the lines between monetary policy and fiscal policy.
These extraordinary efforts were well intentioned. Although it will be some time before we fully understand the effectiveness of various actions, some have credited them with preserving financial markets and saving the global economy from an even deeper recession. Yet, these actions also carry long-term risks for our economies and for central banks.
In this article, Plosser looks at U.S. monetary policy and discusses some of the longer-term risks arising from the Federal Reserve’s policy responses to the financial crisis and slow recovery.