Former Federal Reserve Chairman Ben Bernanke said contractionary monetary policy caused the Great Depression.
The Fed had instituted contractionary monetary policies to curb the hyperinflation of the late 1920s.
That was because dollars were still backed by the gold standard.
The Fed didn't want speculators to sell their dollars for gold and deplete the Fort Knox reserves.
Raising the fed funds rate is easier and achieves the same aim. That's when the Fed buys or sells its holdings of U. More important, inflation hasn't been a problem since the 1970s.
In 1973, inflation went from 3.9 percent to 9.6 percent.
It uses formulas that smooth out more volatility than the CPI does.
If the PCE Index for core inflation rises much above 2 percent, then the Fed implements contractionary monetary policy.
They wouldn't have enough cash in reserve to cover operating expenses if any of the loans defaulted.
If not exercised with care, it could push the economy into a recession. The Fed's target for inflation is a core inflation rate of 2 percent.
Core inflation is year-over-year price increases minus volatile food and oil prices.
Raising the fed funds rate is contractionary because it decreases the money supply.
Banks charge higher interest rates on their loans to compensate for the higher fed funds rate.