Friday, February 7, 2014

Why isn't the Fed more accurate?

The Fed presents a dollar curve based on what the price of reserves will be if all know imbalances were corrected over the medium term business cycle. The Fed could resent a curve that shows what balances remain after medium term imbalances were corrected.  Rather, it leaves the longer term imbalances to be corrected by relative price changes. Would it make a difference? Not really. Showing unresolved imbalances does not eliminate them, it just makes their effect inflation neutral across the curve. The imbalances are then reflected in differing return on reserves that cover them. The longer look back would would include the Secstags. If the Fed were able to estimate the Secstags, then it would need a 50 year bond to make the secstag imbalance average over the long term secstag cycle. Our government generally rebalances over very long periods.  But since the secstags are quite visible in the economy, one might think government is at one of its fifty year inflection points.

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