I begin with the ultimate goal of sustained healthy economic growth and higher standards of living. This of course is a laudable objective, but it requires the correct set and mix of policies. Policymakers must identify which policy tools are appropriate to achieve desired economic performance and the proper mix of policies. While fiscal, tax and regulatory policies heavily influence economic outcomes, today’s hearing focuses on the Fed’s conduct of monetary policy.
Two things have become obvious during the 2002-2007 economic expansion that was marked by the debt-financed housing bubble, the financial crisis and deep recession of 2008-2009 and the current lengthy but slow-growth expansion. First, monetary policy plays a critical role—and serves best by being even-keeled and pursuing a low inflation target during expansions and actively countercyclical in response to downturns and financial crises. Second, there are limitations to what monetary policy can achieve, as some of the sources of under-performance in the economic and labor market are beyond the control of monetary policy and best addressed through other economic, fiscal and regulatory policies— and pushing monetary policy beyond its limits does not improve performance but instead generates risks and uncertainties that undercut desired economic objectives.
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