How Does the Fed Formulate Its Strategies?
The Fed’s job of stabilizing output in the short run and promoting price stability in the long run is made more difficult by two main factors: the long and variable lags in policy, and the uncertain influences of factors other than monetary policy on the economy. What problems do lags cause? The Fed’s job would be much easier if monetary policy had swift and sure effects. Policymakers could set policy, see its effects, and then adjust the settings until they eliminated any discrepancy between economic developments and the goals. But with the long lags and uncertain effects of monetary policy actions, the Fed must be able to anticipate the effects of its policy actions into the distant future. To see why, suppose the Fed waits to shift its policy stance until it actually sees an increase in inflation. That would mean that inflationary momentum already had developed, so the task of reducing inflation would be that much harder and more costly in terms of job losses. Not surprisingly, anti