The more I think and write about monetary policy, the more I think the entire subject is shot through with people over-thinking and over-complicating things. The Fed steps on the gas to generate growth, and steps on the breaks to stop inflation. Two years ago, the Fed saw slowing growth and falling inflation expectations, so for a while it did some gas-stepping. But since January of 2009 or so, data keeps coming in to indicate that conditions are worse than previously estimated. If you step on the gas in response to bad news, then when the news turns out to be worse than you thought it was you need to redouble your efforts. This isn’t brain surgery. Nor does it take a genius to understand why with the Fed refusing to respond in the obvious way to new data we keep not recovering. What else is supposed to happen?
Of course given the fact that the policymakers charged with macroeconomic stability aren’t doing their jobs correctly, we have a bunch of interesting phenomena to analyze. For example, firms are hoarding cash and spiking productivity isn’t leading to new hiring. It’s interesting stuff. But if month after month we saw higher-than-anticipated inflation and had no response and then inflation got out of control nobody would be very interested in the micro-dynamics of firms’ pricing decision, they’d be wondering why policymakers weren’t responding to events.