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Around the World in 90 Days : Part II

December 05, 2020

Contrary to expectations , the fed has not been able to reach the 2% target range. Despite the huge deficit the interest rates have not risen. And when the unemployment rate hit historical lows the inflation did not flare up. This is not a great track record which merits a revision of the fed model and approach. Ironically according to Mr. Powell, the price rule solved at least one of these two problems. The inflation rate, yet he is taking a backward step in this regard. He is ignoring the possibility that the policy based on the results of the Fed model may be leading him down the wrong path. As the Powell fed further relaxes the Bernanke operating procedures, the relaxation makes the Fed even more dependent on the accuracy of the estimate’s variables such the r-star and u-star. If the Fed estimates are correct its operating procedures will accelerate the economy move towards full employment and price stability. If the r-star and u-star estimate are not correct, bad things can happen. For example , an underestimate of r-star leads to a tightening that results in a slower growth in the monetary base. This in turn leads to a consistent underestimate of the inflation rate, just as as the Bernanke operating procedures have. The wrong “star” forecast also leads to the possibility that the end of economic expansions will be accompanied with either an overheating economy or a financial crisis.

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The ValueTiming™ strategy is based on the assumption that politicians and policymakers have particular views of the world, and that they will in general adopt policy measures that are consistent with these views.


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