The Shower Knob Analogy of Monetary Policy

The analogy of monetary policy is like a person adjusting the temperature of a shower. Just like turning the shower knob from cold to hot, monetary policy takes time to have an effect. The Federal Reserve keeps making adjustments, but it takes time for the changes to impact the unemployment rate. So, they need to be careful not to overdo it and cause unintended consequences, just like turning the knob too far could lead to scalding water.

Watch more of this short video from Markets To Hit New Lows When Inevitable Recession Hits? | Eric Basmajian.

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