What we know about what happened afterward

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Question: In mid-2002, real growth fell from 5% in the first quarter to 1% in the second quarter, and the unemployment rate continued to rise. The stock market was down over 20%. Inflation was stable at about 2%. Many people were worried about the viability of the corporate sector because of the explosion of scandals and fraud in major corporations. However, the Federal funds rate had already been reduced to 13/4%. Even if the economy limped along at a 2% growth rate in the second half, the Taylor Rule would still suggest a funds rate of about 4%. Given this information in mid-2002 - and disregarding what we know about what happened afterward - did the Fed follow the correct policy by easing further to 1¼%?

Reference no: EM132127741

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