Given the circumstances, we have also experienced a remarkably orderly shift in the mix of monetary conditions, to one more reflective of the current realities facing the economy. But clearly it would be a mistake to believe that this is the last time the framework will be tested.
Ordinarily, financial market participants would expect monetary policy to react by increasing the target federal funds rate over time to keep output near potential and inflation near its desired level. Thus, the enactment of a sustained fiscal expansion would trigger an increase in expected short-term interest rates and hence longterm interest rates.