Studying the U.S. Economy’s Great Tug-of-War
In many ways, central bankers are like physicians (and in some ways, Mr. Market is a hypochondriac, but that’s beside the point). Central bankers are constantly trying to diagnose the condition of the economy and prescribe medication for what ails it in times of trouble. During the financial crisis in the U.S., this looked like the Federal Reserve bringing the economy onto the operating table for open-heart surgery: bailouts, near-zero benchmark interest rates, and unprecedented monetary stimulus.
Whether or not the Fed is treating the symptoms or the causes of slow economic growth is, technically, up for debate. Many policymakers and economists, including those at the Fed, agree that monetary policy is a tool best used to impact economic conditions in the short term. Low interest rates can catalyze business activity, but quantitative easing and the zero-bound are not sustainable.