As shown in Figure 1, over the past two decades, the
Fed has set the federal funds rate,a key gauge of the
stance of monetary policy, in a fairly consistent fashion
relative to various economic indicators such as
unemployment and inflation. (Figure 1 shows the
quarterly average funds rate and unemployment rate,
and the four-quarter inflation rate for prices of core
personal consumption expenditures.A data file is
available via the online version of this Letter.) During
the current and two previous recessions—around
1991, 2001, and 2008—the Fed responded to large
jumps in unemployment with aggressive cuts in the
funds rate. In addition, episodes of lower inflation also
were generally associated with a lower funds rate.