Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 30

correct amount of force to eliminate inflation. Or should the Fed react at all? Maybe what seems like an inflationary condition is a false alarm, or maybe the economy will heal itself on its own without external intervention. These are the basic questions the Fed must respond to when its policy-making arm meets to review its Monetary Policy.

The good news is that over the years the Fed has learned to better analyze the economic signs and formulate an effective plan to carry out its mission to normalize the economy. The bad news, however, is that no matter how diligent the Fed may be in its analysis, there will always be an unknown parameter that may escape detection and unleash its venom into the economy, totally undeterred until it is too late. A metaphor that comes to mind is the process of getting regular physicals at the doctor's office. Over the years the medical field has gotten so advanced that almost any strain of bacteria or virus can be detected and destroyed. But there will always be that one malevolent strain which can hide itself so well that will either go undetected or will be assumed harmless and quickly passed over. Worse yet are those strains that for one reason or another have become resistant to traditional remedies. The patient may take comfort in thinking that the prescription drugs he or she is taking are destroying the strain, and all the while the infectious microorganism is taking its toll on the patient with impunity.

So where does the Fed go to look for economic indicators to help shape its decision on the Monetary Policy? Certainly the GDP is one measure. Perhaps the GDP is the most accurate indicator of the economic status, but the problem with just relying on the GDP lies in the fact that it cannot by itself predict the economic condition at a future time, neither can it single-handedly indicate a clear direction for the economy. In other words, the GDP numbers can tell us where we are and where we have been but not necessarily where we are going.


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