The “Overly Optimistic” Fed

In “Reluctant Parties: The Fed and the global economy”, Gavyn Davies writes:

To judge from last week’s surprisingly hawkish FOMC minutes, which I had not expected, the Fed seems to be reverting to type (see Tim Duy). Many committee members have downplayed foreign risks and have returned to their earlier focus on the strength of the domestic US labour market, which in their view is already at full employment.

In his column today for Bloomberg View, Kocherlakota writes:

This kind of uncertainty — about which goals will define the Fed’s policies — is not healthy. Consumers and businesses can’t make good decisions if they don’t have a strong enough sense of how the central bank will act in any situation. Fed officials must have — or be given — a much clearer set of shared objectives for managing the economy.

To wrap up, commenter Bill sent me “Why the Unskilled Are Unaware: Further Explorations of (Absent) Self-Insight Among the Incompetent”:

People are typically overly optimistic when evaluating the quality of their performance on social and intellectual tasks. In particular, poor performers grossly overestimate their performances because their incompetence deprives them of the skills needed to recognize their deficits. Five studies demonstrated that poor performers lack insight into their shortcomings even in real world settings and when given incentives to be accurate. An additional meta-analysis showed that it was lack of insight into their own errors (and not mistaken assessments of their peers) that led to overly optimistic estimates among poor performers. Along the way, these studies ruled out recent alternative accounts that have been proposed to explain why poor performers hold such positive impressions of their performance.

I just became more pessimistic!

One thought on “The “Overly Optimistic” Fed

  1. Thanks for the hat tip. I like Kocherlakota’s “or be given”. I’ve recently concluded that our best hope now is to try to persuade Congress to clarify its dual mandate to mean 5% NGDPLT. Trying to persuade the Fed members with logic is just not getting us there.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s