Monetary Policy Realities

Article excerpt


When the Federal Reserve's monetary-policy committee last month lifted the federal-funds rate a quarter-percentage point for the eleventh time since June 2004, it raised its benchmark short-term interest rate to 3.75 percent. Explaining its latest action, the Fed declared that "monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity."

In Fedspeak, "monetary policy accommodation" simply means that the Fed continues to believe that its actions remain expansionary. The first variation of such accomodation appeared on Jan. 30, 2002. Then, the fed-funds rate stood at 1.75 percent, which was 4.75 percentage points below its cyclical peak of 6.5 percent that prevailed 13 months earlier. It was not known at the January 2002 meeting that the official arbiter of the business cycle would later determine that the recession had ended the previous November.

It is, however, interesting to note that, four years into the economic expansion, the Fed acknowledges that it finds it necessary to continue pursuing a monetary policy that remains "accommodative." This becomes all the more interesting when one realizes that fiscal policy has been very expansionary over the past three years, with budget deficits averaging about $370 billion annually. …