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A Little Fun for a Change - Try the Fed's Own Inflation Model

Confused about what the US Federal Reserve hopes to achieve with QE3? Now you can find out. Stand in for Chairman Ben Bernanke and play the new and exciting game that can be found on the San Francisco Federal Reserve Bank's website "So You Want to be in charge of monetary policy".

Fed Game

Try pegging interest rates at 0.0% to 0.25% for 4 years (which is effectively what the Fed is in the process of doing). Tellingly, the game is only able to graph inflation rates up to 15% but using this approach I promise the numbers will be much higher.

My best score was a 36.87% annual inflation rate pegging the Federal Funds Rate to 0.25% for 48 months. Conveniently for the Fed's model, unemployment always fell to 1.5% in this high inflation world. In countless attempts the Fed's model never produced a stagflationary environment of high unemployment and high inflation. They seem unable to conceive of a world where the inflation they seek to create doesn't improve employment rates (i.e. doesn't stimulate the real economy). I think this may prove to be a bit of a blind-spot in central bank thinking.

 

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