By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts.
Newt Gingrich loves it.A more common view among economists, however, is that the simultaneous tightening of fiscal and monetary policy turned a tough situation into an awful one.
In that situation, monetary policy stops having any effect at all, as happened in Japan in the 1990s and could happen in the United States, which lowered key interest rates to historic lows on Tuesday.
In this situation, monetary policy matters a great deal, and Mr. Bernanke's focus on avoiding deflation and hence limiting the problems for debtors does not seem inappropriate (for more on Mr. Bernanke, his motivations and actions, see David Wessel's book, "In Fed We Trust").
Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate the opportunity to discuss monetary policy and the economic situation and to present the Federal Reserve's Monetary Policy Report to the Congress.
What is more, he says, "We will make monetary policy independently of the political situation".
José Manuel González-Páramo, who has been nominated as Spain's representative to the 18-member policy-setting council of the European Central Bank, told the European Parliament on Tuesday that with interest rates at current levels, "you cannot say at the present situation that monetary policy is harming" prospects for growth.
In signaling during a speech in New York on Tuesday that he stood ready to cut interest rates should the economy show signs of serious trouble, Mr. Greenspan seemed to be emphasizing that the Fed could take care of the situation through monetary policy.
The policy experiment consists of a policy tightening corresponding to an increase by one percentage point in the monetary policy rate, starting from a situation in which the system is in equilibrium and simulating the adjustment of the retail rates over the following year.
So we have a situation in which monetary policy and fiscal policy are both in top gear.
The Federal Open Market Committee, which votes on monetary policy, has three open seats — a situation that may be hindering the taking of decisive action.
