Opportunities and Challenges Confronting Monetary Policy
Congress. Over the most recent business cycle, monetary policy has had to contend with extraordinary economic and financial circumstances, which posed great challenges to the formulation and implementation of appropriate policies. Even now, with a moderate economic recovery under way, a number of unconventional elements continue to complicate this task. An unusually large number of business corporations and households have grown wary of debt, and they are trying to reduce their liabilities. Many financial institutions, which experienced a close brush with financial difficulty or saw their competitors narrowly evade adversity, have become more averse to taking risks in their lending and investing. Moreover, profound changes in the workings of our financial markets have had the largely unpredicted side-effect of severing what had been thought of as dependable linkages between the monetary aggregates and the behavior of the economy at large. The implication of these developments is that our central bank no longer has a reliable measuring rod with which to calibrate monetary policy. It has no choice but to rely on judgment. Therefore, the issue at hand is how it should exercise judgment in the complex period ahead, when we can look forward to modest, but not dynamic, economic growth in the United States, a far more troubled economic and financial environment in Europe and Japan, and sometimes contradictory impulses acting on the rate of inflation.