Which bus would you take?
Photo: Adam E. Moreira. Source: Wikipedia
Imagine that you want to take the bus from Boston to Atlantic City – down I-95, right through New York City. You have three different busses to choose from:
- Bus A is driven by someone who has been down this route before. She knows all the twist and turns on the interstate, and could tell you that the merge with traffic from the Whitestone Bridge off Long Island will slow things down. Her name is Janet Yellen, and she consults with other drivers – on the route, the condition of the bus, the road and bridge conditions – every couple hours.
- Bus B is a rules-based self-driving bus. It’s got sensors and cameras and the latest software – updated periodically by noted driving engineer John Taylor. The “Taylor Rules” have been running simulated busses for years, although they’ve never been tried on a live route. If the bus deviates from the pre-established route, Taylor’s software automatically gets it back on course.
- Bus C is a complicated hybrid, using both humans and machines. The bus has cameras all around it that feed images to many remote controllers. A large number bus drivers sit at those controls, driving the bus as they see fit. The average of all their decisions – steering, braking, accelerating – is fed back to the bus in real time. To motivate good driving, the drivers are rewarded according to whether their individual input resulted in a faster, smoother, and safer ride.
The Fed controls interest rates in much the same way that a driver controls a bus. In the short run, she can steer the bus left or right and speed up or slow down. But over the long run the bus is really controlled by a combination of the highway, the traffic, and everyone’s strong desire not to get into an accident.
Cross Bronx Expressway. Photo: NHRHS2010. Source: Wikipedia
Fed policy seems to work just fine during normal conditions. You could imagine gradual tightening or easing being driven by a set of rules. But when something unexpected happens, you need someone at the controls – someone with experience, capability, and sound judgement.
Something to consider, as the President contemplates who the next Fed Chair should be.
Douglas R. Tengdin, CFA