When the economy is running too quickly (say, inflation appears likely to rise), the FOMC switches to the brake by raising its funds rate target, thereby depressing spending and cooling the economy. What could be simpler than that?2 I wish it were that easy.
Unfortunately, the simplistic view of monetary policymaking derived from the automobile analogy can be seriously misleading, for at least two reasons. First, policymakers working to keep the economy from going off the road must deal with informational constraints that are far more severe than those faced by real-world drivers.