[jerich]

Although I know financial markets are extremely complex and driven by human psychology, I can’t help thinking about thinking about it in terms of classical control systems.

Do you want a smooth input, or an abrupt step input? Psychologically, I’ve got to believe there would be a quicker response by consumers if rates shot up overnight vs “boiling the frog” with a gradual increases.

In simpler dynamic systems, you get a faster response with overshoot and ripple, maybe this would be similar? But would it be better? I wish the article author had been able to find more discussion by economists talking about the potential effects.

Could you pull out of a recession or pop a forming bubble in months instead of years? Maybe it could lead to a smoother Macro-macroeconomics. But maybe the overshoot is too much; maybe the system is just too chaotic to control effectively.

Financial markets dislike abrupt changes, but I think if the central bank was perfectly transparent about their goals and responses (“To maintain a annual growth rate of 1.9%, Fed decisions will be made based on a PID controller with the following parameters…”), some smart financial engineers should be able to account for the rapid changes in their own models. Maybe there’s even some profit potential anticipating the overshoot and ripple that could provide some dampening effects.

I’m sure I’ve completely Dunning-Kruger’d this and millions of lives would be ruined, but since I’m not the Fed Chairman, we’re all safe.