Significant gains in U.S. monetary policy performance emerged only during the past three decades, not gradually over the Federal Reserve's century-long history, according to a new paper by Federal Reserve economists Regis Barnichon and Geert Mesters published November 9, 2026. The research, which examines 150 years of American monetary history from 1879 through 2019, reveals that the Fed's systematic responses to economic shocks didn't materially improve until after Chairman Paul Volcker's disinflation program. The study compares how closely policy matched the best feasible response given the economic conditions and disruptions policymakers actually confronted.
The researchers evaluated four distinct periods: the pre-Fed Gold Standard era (1879–1912), the early Federal Reserve (1913–41), the postwar period (1954–84), and the post-Volcker era (1990–2019). Throughout the Gold Standard, early Fed, and postwar periods, the required corrections to the policy path remained above 100 percent on average, showing the systematic reaction function stayed far from optimal. Only in the post-Volcker period did these corrections drop substantially to around 30 percent average absolute correction and become statistically insignificant. The economic consequences of policy errors varied dramatically: the early Fed period generated 97.4 percentage points of avoidable macroeconomic loss (measured in expected squared inflation and unemployment deviations), compared to just 3.2 percentage points in the post-Volcker era. The Gold Standard registered 8.4 percentage points and the postwar period recorded 6.6 percentage points of distance to minimum loss.
The most striking improvements came in handling financial crises. During the 1920s and 1930s, the Federal Reserve's response to banking panics was far from the best feasible policy, with adverse financial shocks followed by higher policy rates that made monetary policy contractionary exactly when the economy needed support. The modern Federal Reserve reversed this pattern, lowering interest rates following financial shocks with adjustments that became both much smaller and statistically insignificant. The Great Inflation of the 1960s and 1970s reflected weak responses to supply shocks rather than poor crisis management, the authors found. Following inflation expectation shocks during that era, the policy rate responded only weakly, allowing real interest rates to fall and reinforce inflationary pressures.
Comparing monetary policy across history requires separating the quality of policy from the economic environment in which it was conducted, the researchers explain. Their framework addresses this by comparing policymakers with the best policy response feasible given the shocks they faced, rather than judging them by outcomes alone. The distinction matters because one central banker may confront a severe banking panic while another presides over a long period of economic stability, making outcomes an unreliable measure of decision quality. The concentrated gains in responding to financial crises and supply shocks suggest that institutional learning happened unevenly, with breakthroughs coming late rather than through steady incremental progress over the Fed's history.