U.S. Monetary Policy: Has Anything Changed?

May 21, 2008

One of the most important lessons that can be learned from probability theory is that the shorter the time horizon one assumes, the more the world appears to be random, even if the odds of a particular outcome are quite high over a longer period of time. This is the reason given for focusing on a process of decision making that derives from a tested model or schema rather than short run outcomes. It is why we need to focus on the underlying situation rather than current headlines that we read daily in the newspaper or hear on the TV monitors.

Currently we are reading about the stabilization of the value of the U. S. dollar, but it depends upon the currency we are talking about. We are hearing that the economy is in a recession - or it is not in a recession. We listen to the speeches and testimony of the Governors of the Federal Reserve System and the Presidents of Federal Reserve district banks and they don’t give us a consistent picture of the economy or of the future of monetary policy. The Secretary of the Treasury puts out frequent optimistic comments, but no action occurs. Furthermore, are commodity prices near their peak, or not? What about inflation? What measures of inflation really provide us with the future direction of prices? The CPI? Housing prices? Oil prices? And, so on, and so on.

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