Larry, I just don’t understand what is so “chaotic” about the very very very very very very simple thing I suggest doing. What is so hard about saying, “We’re gonna pump the gas just a little, but we are prepared to slow back down again if need be”? ??!!!???? For most ordinary human beings, the natural tendency if trying out a new thing is to be biased in favor of going back to the starting point if the new thing doesn’t work. If you are going the speed limit and then speed up a little, your bias will be towards slowing back down. If you are climbing a tree and climb a little higher, your normal bias will be toward climbing back down to your original perch if the higher branch shakes too much. And so on. The Fed could make a very clear statement: “In light of some pressures on the building and housing loan markets, we are cutting the Funds rate by one-quarter point, and one-quarter point only, with no expectations of going farther. We think the underlying economy is still quite sound, though, and that with this one slight easing, the likelihood in the future is that the current credit crunch will work itself out. Inflation seems to be taming right now, but if inflationary pressures build up again, we will not hesitate to raise the Funds rate back again by the same quarter point.”
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