Should the Federal Reserve System focus only on controlling inflation?

Question

Should the Federal Reserve System focus only on controlling inflation?

Answer 1

Yes! That should be it's primary focus. It is now widely accepted among economists that monetary policy -- changes in interest rates -- has only a temporary effect on the economy. For example, lowering interest rates might stimulate the economy because borrowing costs are lower, but this increase in demand just leads to an increase in prices after some months.

So, the policy change only led to inflation. Moreover, if the public starts to think that the Fed will continue to lower interest rates in this way, inflation will just occur faster!

At the end of the day, economic theory -- at least these days -- beleive that the Fed has a limited ability to influence the economy and should just focus on keeping inflation low and steady.

Answer 2

Absolutely not!

Controlling inflation is easy; just restrict the money supply to reduce wages, buying power, and investment.

Monetary policy should aim to stimulate ecomonic growth as much as possible but still within inflation targets. It's a tricky and elusive balance.

In fact, in the Feds mission statement of 100+ words, only two words directly refer to controlling inflation.

From the Fed web site:

"The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve’s duties fall into four general areas:

- conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

- supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

- maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

- providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system "

(Ref: http://www.federalreserve.gov/generalinfo/mission/default.htm

Answer 3

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Answer 4

The stated goal of the fed is full employment and low inflation