Fed’s dilemmas:Binary outcomes and fat tails

Fed has finally summoned sufficient courage to take a plunge. In the past,there have always been some externalities to deal with, but this time thedecision was made easier by investors charging ahead, as Hacker in ‘YesMinister’ remarked, “I am their leader; I must follow them”. The key questionhowever remains whether the US is already suffering from ‘stagflation lite’(low and volatile real GDP and rising inflation). If the answer is in affirmative,then Fed would be compelled to rediscover its Volcker’s character and getahead of the curve. Stagflation is not the only uncertainty. Fed also needs totry to minimize divergence of monetary policies whilst assessing impact ofpotential changes in fiscal policies (US and globally) on growth & productivity.