Everyone On Wall Street Is Buzzing About ‘Optimal Control’ – The Janet Yellen Approach To Monetary Policy

Matthew Boesler
November 4, 2013

Since mid-September, when former U.S. Treasury Secretary Larry Summers withdrew his name from consideration to replace Ben Bernanke as chairman of the Federal Reserve next year, market participants have become increasingly interested in the policy views of current Fed vice-chair Janet Yellen, who is now set to take the reins at the central bank when Bernanke’s term expires in January.

One item in particular has become the center of attention for those trying to figure out how a Yellen Fed will be different: the “optimal control” approach to monetary policymaking, as outlined by Yellen in a series of speeches last year.

Michael Feroli, chief U.S. economist at JPMorgan, sums up the idea succinctly in a recent report: “This approach starts with a forecast for the economy, and then solves a large-scale macroeconomic model to find the path of the funds rate that minimizes the deviation of inflation and unemployment from their respective targets.”

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