In this question, we drop the assumption that the Fed is certain of the correct timing and magnitude of increases in short term money market rates in the US.
a) What are the Fed’s goals for equilibrium inflation rates and employment growth?
b) What circumstances in the US and world economy suggest that a “dovish,”slow approach to raising money market rates is appropriate at this time?
c) What is the danger in pursuing an extremely dovish policy of very slow and cautious increases in the federal funds rate target at this time.