The Optimism ProblemYet this market exuberance, which has ebbed somewhat for the moment, amounted to a “loosening” or “easing” of “financial conditions.” It was, therefore, a source of consternation for the Fed, which has been trying to tighten financial conditions for more than a year now.The minutes of the Dec. 13-14 meeting of Fed policymakers in the Federal Open Market Committee were revealing: “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability.”The idea is that by making it more expensive and more difficult to borrow money, the Fed can slow the economy — and squeeze rampant inflation out of it. But this isn’t a straightforward proce …
