They're operating with a lag, which any first year engineer can tell you will result in an oscillator if not sufficiently damped
With sufficiently complex dynamics in the forward loop. The real problem is that the Fed doesn't look quite as far ahead as the stock market, the lag they have is with respect to the market, not with respect to the economy. See, looking back, with my perfect 20-20 hindsight, the writing was on the wall back in April 2000, when the slide began. The Fed easing began only in December 2000, just ahead of the visible slowdown in the economy. So they are actually just slightly ahead of the observable economy, but the market is way ahead of them.
They should simply adjust to whatever they think they need to get to in one big drop *now* (3.0 percent or whatever), and then start tracking the market, raising rates as the market rises, with a predicable and publicised 1 month lag (so that the market could take that into account as it moves on a daily basis). That way we'd probably get a stable system and damp out this whacking great oscillation we've gotten into. The only free variable would be the gain between stock market and interest rates, and that would be somthing that could be estimated using adaptive filtering algorithms over the long term.
Heck, I should be the next Chairman of the Federal reserve, on a rotating basis with all the other experts on these forums :)
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