When Too Many Expectations Are Placed on Monetary Policy

The Federal Reserve’s Dual Responsibilities

Congress has tasked the Federal Reserve with two primary objectives: ensuring stable prices and promoting maximum employment. To fulfill these goals, the Fed employs a range of strategies, including adjusting interest rates, managing its balance sheet, and issuing public communications. These measures are especially important during significant economic challenges, such as the COVID-19 crisis and the sharpest inflation surge since the early 1980s.

While these monetary policy tools are effective in moderating excessive demand and providing support during economic slowdowns, they have their limitations. They cannot substitute for robust fiscal policy, nor can they resolve deep-rooted structural issues within the economy. Recent research continues to highlight these constraints.