Thursday, April 29, 2010

If there were three simultaneous vacancies on the Supreme Court, Washington would be a war zone, and the volume of direct mail would solve the post office's financial problems. Not so with the Federal Reserve. When the Fed is discussed in a political context, the talk normally comes from the fringe (as in the Ron Paul fan club's chants of "End the Fed"). Yet its decisions powerfully affect everyday life in a way that's rare for a court decision. ...

For all that elected officials talk about how their policies will create jobs or their opponents' policies will destroy them, in normal times it's the Fed -- not the White House, not Congress -- that determines the pace of job creation. (Its dual mandate from Congress, after all, is to promote stable prices with maximum employment.) When the Fed's Open Market Committee wants the economy to grow faster, it reduces interest rates. When it wants to slow things down, it raises them. The committee's willingness to cut rates to historically low levels in the wake of the 2001 terrorist attacks and the dot-com bust helped avoid a severe recession -- but many also think that its willingness to hold them so low for so long fueled the credit boom that led to our current bust.

Matthew Yglesias via Ezra Klein

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