The Fed has consistently said that it will not raise the federal funds rate any

Question

The Fed has consistently said that it will not raise the federal funds rate any time soon. The Fed’s challenge will be how to get monetary policy back to normal over the next several years. The Fed has to make a judgment about timing—tightening too early could send the economy back into recession, as happened during the late 1930s; waiting too long would set the stage for inflation.                                                                          Source: The New York Times, November 5, 2009

If the economic recovery slows and the economy slips back into recession, what effect will the Fed’s no-change decision have on the economy?

Explanation / Answer

If the economy slips back into recession, Fed's no-change decision would be positive on the economy. Because during the time of recession there will be a fall in demand. In order to boost the demand and encourage the investments, Fed has to continue with low funds rate.

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