Caroline Baum has an interesting discussion of feedback loops and Fed policy on October 19 in Bernanke Frets Over Sherlock Holmes’s Next Stop.
Federal Reserve policy makers like to explain the world in terms of feedback loops, except those of their own making.
Last year, a negative feedback loop threatened to deepen the financial crisis as a weak economy and a teetering banking system led to layoffs and production cutbacks, which led to even bigger declines in output and employment.
Last month, officials heralded the onset of a “positive feedback loop,” wherein better financial conditions and stronger growth in employment and output lead to a stronger stock market and improved financial conditions, according to minutes from the Fed’s Sept. 22-23 meeting.
At some point, of course, the loop gets broken. Otherwise, the economy would head in one direction, up or down, forever.
Where is the discussion of the Fed’s inflation expectations feedback loop, which yields no feedback and less information?
Expectations Loop-de-Loop
If I have this right, we’re waiting for the Fed to do or say something to help us decide whether we should hoard cash (because we expect the dollar to buy more tomorrow if prices are falling) or buy and hoard hard goods (if we expect inflation to diminish the dollar’s purchasing power).
The Fed, in turn, is waiting for us to do something so it can decide what to do: either raise the volume on its anti- inflation rhetoric with talk of exit strategies and price stability; or talk softly to allay fears of premature rate increases to keep market rates from rising.
If I read the minutes and other Fed communications correctly, policy makers are relying on us to tell them what to do, we’re relying on them for direction, and we’re locked in this no-way-out feedback loop that provides no useful information for either party.
To say that you and I have the ability to create inflation on our own flies in the face of monetary theory. If we did have a set of keys to the printing press, the Fed would have more
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