Blog: Will "Cooking the Frog" Work for the Fed this Time?

Back in the 90s we came up with a way of looking at Alan Greenspan's gradualist approach to monetary policy. It went back to an old myth that you could put a frog in a pot of cool water and gradually warm it. The frog would not notice and gradually be boiled alive. The story is a myth, but it was an apt way to explain Greenspan's method. Greenspan felt that you should gradually increase or decrease interest rates so as not to shock the financial system and the economy while you control inflation. The hope was that the system would never notice that someone was regulating it.

Like the cooking the frog story, that never worked as advertised. But that hasn't stopped the Fed from trying. In theory it should work as my post on the Logic of Failure discussed. But usually something exogenous happens to derail the Fed's good intentions. Despite this, the world's central banks have generally adopted this method.