Final answer:
When the Fed uses its judgments about the current economic needs to shape monetary policy, it is following a discretionary policy. This approach contrasts with strict rules-based policies and allows for flexibility in response to economic changes.
Step-by-step explanation:
If the Federal Reserve (Fed) bases its monetary policy on judgments of its policymakers regarding the current needs of the economy, it is following a discretionary policy. This type of policy allows for flexibility and the ability to respond to changing economic conditions. The alternative approaches, such as a monetary base instrument rule, an inflation targeting rule, a wait-and-see policy, or a money targeting rule, involve more structured and specific guidelines that the central bank would follow.
Discretionary monetary policy can be influenced by various macroeconomic goals such as controlling inflation, managing unemployment rates, and stabilizing the financial system. In comparison, strict rules like inflation targeting require the central bank to focus solely on keeping inflation within a target range, whereas a money targeting rule would fixate on controlling the growth rate of the money supply.
The choice between discretionary policy and strict rules is a matter of ongoing debate among economists, with some emphasizing the importance of central bank independence and adaptability and others advocating for the predictability and discipline provided by strict rules.