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Are We Sure The Fed Knows How The Economy Works?

December 18
15:28 2017

Janet Yellen chaired her last meeting of the Federal Open Market Committee (FOMC) on Wednesday. The meeting, during which the members set monetary policy, went as expected. A majority voted to raise the Federal Reserve’s target range for short-term interest rates to 1¼ — 1½ percent.

For all appearances everything looks to be going smoothly as the Fed transitions from one chair to the next and continues to normalize monetary policy after the extraordinary actions it took after the 2008 financial crisis.

Unfortunately, things are not as calm and clear as they might appear. The Fed will soon have to face a problem: they don’t know what causes inflation and therefore don’t know what to do if it starts to rise or fall.

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