I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2%, or if financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.
It's fine for the Fed not to have a rigid plan -- it's even good -- but your company needs a plan. As planning season is coming right up, here are three lessons from the Fed's "No-Plan" that you can use at your company:
- Don't expect the Fed to get it right. They may get it right, but don't expect it. Chairman Bernanke's statement may imply an ability to fine-tune the economy. They'll adjust the monetary policy throttle up or down depending on conditions. I approve, but monetary policy works with a time lag. Milton Friedman described the lags as "long and variable." That means that if the economy slumps, the Fed will not be able to react in time to prevent your sales from slumping. Similarly, if the economy accelerates too fast, the Fed won't be able to prevent that immediately.
- Be ready to adjust your plans. A business needs a plan, but given the uncertainty about the economy, regular adjustment needs to be part of your plan. The Federal Reserve has many of the brightest economists, with huge resources of data and computers, and they are not sure what the economy will do. Whatever resources you put into predicting your sales, I'll guarantee you that the Fed puts more resources into forecasting the economy. Given their uncertainty, you need to be humble about your own forecasts. Make your plans adjustable; having projected headcount is fine, but if your sales are not meeting plan, then your hiring probably shouldn't either.
- Set trigger points for your contingency plans. One of the Fed's good moves is to set numerical trigger points for the unemployment rate and inflation. Most people tend to procrastinate before taking unpleasant actions. It's easier to do the unpleasant deed if you told yourself, back when things were calm, "I'll take this action once this metric hits this level."
For more on this topic, see my videos on business planning in an uncertain economy.