According to HowStuffWorks, this is how the fed works:
The Fed watches economic indicators closely to determine in which the direction the economy is going. By forecasting increases in inflation or slow-downs in the economy, the Fed knows whether to increase or decrease the supply of money.
Influencing inflation takes a long time and has to be looked at as a long-term goal. Influencing employment and output, however, can be done more quickly and therefore is a short-term goal. Finding the balance between the two is key. The lags in the effects that monetary policy has on the economy are significant. This is why the Fed has to make forecasts of inflation prior to it actually happening — one, two or even three years in advance. If the Fed waited until inflation were apparent, then it would be extremely difficult to catch up and get it back under control. We’ll talk about the economic indicators shortly.
They are forecasting three years in advance? And finding the balance? Hmmm.
Well, that’s my bromide for the night. I’ll sleep well knowing it’s all under control. Reminds me of standard line from TV cop shows: Alright, move on. Nothing to see here. Please disperse.
{ 13 comments }
Actually the Fed uses these forecasts as guidelines instead of rules and the whole Fed process is more of an art form than a science.
What were you doing looking up the FED on howstuffworks?
@Bill It is an art that doesn’t work because it is too difficult for any group of people to control crucial aspects of the markets such as interest rates because the market is too big and too complex to gauge, not to mention that doing so only leads to bubbles.
I hope this is not mean seriously. It is?
Who’ll save us from such “brains” or was it brain-deads.
So the only thing standing between us and eternal prosperity are some Keynesian “macroeconomic” models that the Feds need to solve? Apparently some people have never woken up from the 1960′s.
Do you suppose anything would happen if we all filed complaints/suggestions at the website about how the Fed *actually* works?
Lots of people look up stuff on How Stuff Works. It’s a great site for more technical information, but obviously not for economics.
The Fed process is an art, all right: the art of playing Witch Doctor, performing an elaborate show, and then either accepting the credit for the good times or avoiding the blame for the bad times.
“…then either accepting the credit for the good times or avoiding the blame for the bad times.”
And therein lies the skill—specifically, that of prevarication.
Pax et bonum,
Keith Töpfer
…the popular ‘HowStuffWorks’ website has a simple corrections-to-content section under “Contact Us” — why not submit a brief ‘correction’ to that Federal Reserve article (?)
A few people offering correction… might get their attention/action in Atlanta HQ.
Note that the author of that article is listed as a journalism/marketing graduate from the University of North Carolina at Chapel Hill. Are not journalists & marketeers qualified to authoritatively describe economics… and the operation of the Federal Reserve ?
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{What’s the business-model for HowStuffWorks ?
How do they make a profit ?}
I thought the way the Fed works was when the economy is strong, they sap as much out of it as they can. When the economy is weak, they back off and try not to strangle it.
And when the economy is failing, they wring their hands and watch helplessly as their goose that laid the golden eggs dies of the wounds they inflicted.
Isn’t that how it really works?
Actually, if things worked like that, it would be practical to handle inflation in the short term too, with the methods used for demagnetising ferromagnetic alloys. You would simply apply a rapid cycle of alternately deflationary and inflationary measures (or vice versa), starting with large ones and bringing the size down while cycling around the target level. In real life people would respond by changing their expectations, holding off on activity until things stabilised and so on, so the most you might get away with is a brief application of the technique going big deflation, medium inflation, small deflation over maybe a nine month period – but it still might not work, and it’s not that much quicker than what they are trying for now.
There is a very interesting book, “The Black Swan: The Impact of Highly Improbable Events,” which discusses the futility of prediction, especially in economics and government. Unforseen events can have a huge impact, and afterward lots of people can give you good reasons for what happened, but not before. The financial meltdown certainly qualifies, and probably anything the government comes up with will be harmful in the long run. I worry a lot about all the debt we are pushing on our progeny, and about the possiblility of hyperinflation. That is ugly, and has happened in many societies–like Zimbabwe right now.
Mr. Downing,
Actually, the meltdown was quite predictable, except for naming the precise time at which the house of cards would begin to tumble. Several people predicted the mortgage market collapse, including both Congressman Ron Paul (September 2003) and investment broker/financial commentator Peter Schiff (at least by 2006), both well before the collapse actually started. So, whoever wrote “The Black Swan” obviously suffers from a physical deformity, but, by way of compensation, also obviously has a good view of his own ileum on that one, at least.
Pax et bonum,
Keith Töpfer
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