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Nobody Knows What The Fed Is Doing

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It’s widely expected that Yellen will emerge from the deliberations on Wednesday announcing that the Fed intends to keep short-term interest rates near zero. But what comes after that, at the Fed’s meeting in January and beyond, is anyone’s guess.

The Fed’s behavior—hinting at rate increases but never delivering—has even prompted economist John Taylor, a monetary policy expert, to assert that, “nobody knows what [the Fed] is doing.” In an age when the Federal Reserve is communicating more and more with the public, the public seems to have less and less of an idea what the Fed is going to do next. And there’s a simple explanation for this confusion: economists have a much looser grasp on what causes changes in inflation and employment than they’d like us to believe. http://fortune.com/2015/10/28/inflation-janet-yellen/

Neither Friedman nor Phillips’ theories can explain why inflation is so low in today’s world.

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Neither Friedman nor Phillips’ theories can explain why inflation is so low in today’s world.

The Phillips curve is too simplistic. It was empirically refuted in the 1970s. Friedman was a patron saint of the neoclassical school and a true-believer in general equilibrium. But real markets are dynamic not static and almost always operate far from equilibrium.

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The Fed should have guessed that homeopathic remedies never work- trying to cure a debt problem with more debt was always a non starter- especially given that their delivery mechanism was the banks, who had proved beyond reasonable doubt that any money they got would go straight up their nose and not into any kind of real world productive investment.

But wasn't it always really about bailing out the wall street gamblers? All that guff about 'the wealth effect' was pure window dressing- and on some level they knew it.

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