We have a shadow banking committee!

Economic Principles talks about it. Let's try some corrections, shall we!

To repair its damaged credibility and place its policies back on solid analytic foundations, the FOMC should place greater emphasis on its continued commitment to the two percent long-run inflation target first established in January 2012. Next, the FOMC must embody its objectives in an explicit and empirically defensible monetary policy rule.

Now what they really mean is a 2% variance in prices. They want the second difference, not the first.

The monetary policy rule should also be somewhat countercyclical, recognizing that, within limits, monetary policy can be used to stabilize output and employment over the medium term, even as it focuses principally on stabilizing prices in the long run. The policy rule will then ensure that the Fed remains accountable in achieving both sides of its statutory dual mandate.

At equilibrium there are no cycles, money is no arbirage, meaning it is a Weiner process.   Ultimately the cycles are the result of fiscal budget cycles, and the 2% first difference was set by the necessity of accommodating fiscal cycles, it comes out of the way John Taylor had to set his stability parameters to get his stationary coefficients when DC does its cycle.

Any workable rule must limit the set of variables to which policy responds. This imposes discipline on policymakers, avoiding the temptation of excessive fine-tuning and ensuring that the Fed remains insulated from fiscal pressures. It also helps the Fed remain forward-looking, as it must be to account for the long and variable lags with which its policies affect the economy.

Long and variable lags are the responsibility of the banking network. They are best handled by having a competent system allowing entry and exit of member banks.  The Fed is, at equilibrium, a Black-Scholes spreadsheet, and should be operating at the short end of the curve. I have no idea what excessive fine tuning means, but the tuning rule is simple, when hyperbolic flow constraints are not met, the spreadsheet seterilizes losses or gains and resets deposit and loan rates, projected over the next two periods.

Within such a rules-based system, several very specific points of guidance for monetary policymakers become clear. First, historical experience tells us that whenever interest rates are too low for too long, financial markets become distorted and inflation begins to rise.

Hyperbolic discounting at equilibrium along with optimum selection of member banks handles all this.

Summary:

• Currency policy is a no arbitrage spreadsheet
• Human skills involve recruiting great bankers
• Government is acting like a foul member bank.