Dynamic concept Monetary policy

Dr. Bernanke adopting feedback in his monetary policy

In my note on Jan 26, 2013, I recommended an article by Bill Gates (reference 1) who realized the importance of the measurement and feedback in his tackling complex social issues. While I was thinking through the nonconventional monetary policies conducted by the U. S. Fed since the financial crisis in 2007, I found that the Fed, chaired by Dr. Bernanke, has shifted their policies from open loop basis to feedback basis.

There are two categories of nonconventional monetary policy tools used by the Fed so far.

The first is so called “communication tools” – forward guidance on anticipated path for the interest rates set by the Fed. This method started in August 2011, the Fed used calendar dates to indicate how long the exceptionally low interest rates would be warranted. Such calendar date was late made explicit and extended in the following Fed meetings due to slower than expected economic recovery in the U. S. Using a calendar date in monetary policy is an open loop concept, using only forward looking and no economic measurement as feedback. The Fed seems to realize that the open loop method did not perceptionallynconnect the policy to its mandate – to control inflation and to maximize employment. At the Fed meeting in December 2012, the Fed shifted the communication tool to indicate that the low interest rate policy would not change as least along as the unemployment rates remains above 6.5% and inflation is within the Fed target. The new method included measurements of the unemployment and inflation and the Fed will use them as feedback in conducting future monetary changes.

The similar evolvement from open loop basis to feedback basis can also be seen in the second nontraditional policy tool – large scale purchases of long-term securities. Fed has engaged in several rounds of security purchases since late 2008. The program started with specifying the amount of total purchases based only on forward looking. In September 2012, the program was evolved into open-ended amount of purchases in the sense that as long as certain goals are not achieved the Fed will keep buying securities with no limit set ahead (the program is sometime called QE infinite). Again the policy actions are now dependent on measurements and feedback. In a latest speech by Dr. Bernanke (reference 2), the measurements are fine tuned to include in addition, efficacy, cost, risk, financial stability and implications to federal budget.

In retrospect, it is easy to see the deficiencies of the Fed monetary policies based only on forward terms. It is naturally to anticipate the evolvement into feedback basis policies if we have strong concept of measurement and feedback in our mind. In that sense, people with education in control theory, should have more contributions to the future monetary policy making, in fact, to all the other areas like Gates’ solving the world’s biggest problems.


1. Bill Gates: My Plan to Fix World’s Biggest Problems, Wall Street Journal, Jan 25, 2013.

2. Statements by Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System before the Committee on Banking, Housing, and Urban Affairs, U. S. Senate, Feb 26, 2013.

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