When your tank is almost empty and the engine is gasping, fill it up with a better grade fuel

To me this was the best part of the Minutes, the only real forward-looking one; the rest was the usual BS!:

A lower long-run level of r* [natural real rate of interest] would also imply that the gap between the actual level of the federal funds rate and its near-zero effective lower bound would be smaller on average.

A smaller gap might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough to promote a strong economic recovery and rapid return to maximum employment or to maintain price stability in the aftermath of negative shocks to aggregate demand.

Some participants noted that it would be prudent to have additional policy tools that could be used in such situations.

Better think hard and choose carefully, if only to avoid falling into another trap. Unfortunately, from the wording, it seems they don´t grasp the fact that if there is something the Fed can avoid, or at least minimize the effects, are shocks to aggregate demand.

3 thoughts on “When your tank is almost empty and the engine is gasping, fill it up with a better grade fuel

  1. Interesting for Market Monetarists that the markets didn’t seem too concerned by the statement. Stocks up, currency sideways, bonds not much moved either. I suppose a rise is “priced in” now. If it’s priced in then we’ve already had the first tightening.

  2. Of course, you are right, as always.

    Though I did think that when they raise rates they might also do some offsetting policy easing, I just couldn’t figure out what. Perhaps that is what is meant by “additional policy tools”, and thus stocks were cheered up.

    After all when they cut rates and did QE they offset it with IOER and the strict inflation target.

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