September 22, 2020

This is the second installment of a series of 4 reports analyzing and reviewing the Fed policies during the last 5 decades, determining what worked and what did not. With these insights, our last installment will focus and assess the new agreement forged by the Fed on how it will conduct monetary policy in the long run. Price stability and full employment are widely accepted policy objectives. Professional economists are well trained and in general have a logical rigorous process. Therefore, once the assumptions are made and accepted, most economists reach conclusions like those of the model builders. The conclusions and policy recommendations are not invariant to the modelling assumptions. The economic assumptions are a key driver of policy recommendations and we should pay special attention to the assumptions behind any policy recommendations. Presumably if as time goes on the policy recommendations do not produce the desired results , the economists must revisit their assumption and alter their models in the hopes of improving their representation of reality and thereby produce better policy and the desired results. Since there is considerable disagreement as to the policy is mix that produces the desired outcome. To illustrate the importance of assumptions in economic modelling and the dependency of the policy recommendations on these assumptions we use as a reference point two alternative assumptions regarding the relationship between inflation and unemployment. The insights and conclusions yielded by the two alternatives are then used to interpret the past and then extrapolate to anticipate the impact of the Fed announced policy objectives and the procedures it will use to pursue the objectives.

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