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Hubris

People in positions of power seem to believe that modesty is unbecoming of their lofty positions. They often exhibit hubris, thinking that they know things and can do things that are really well beyond their reach. For example, people at the Fed seem to believe that they control interest rates. At best, they influence interest rates. At worst, they cynically watch for movements in rates and declare that any movement is in the direction they intend.

They do not control market interest rates. By far, the biggest factor in determining the level of interest rates is the rate of inflation. Of course, the Fed influences the rate of inflation. By far, the biggest factor in determining the steepness of the yield curve (i.e., interest rates as a function of the term of the instrument) is the difference between the current rate of inflation and the expected future rate of inflation. Again, Fed actions influence these magnitudes.

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