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Federal ReserveChairwoman Yellen has recentlywarned in testimony before the House Financial Services Committee, “It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule...it is utterly necessary for us to providemore monetary policy accommodation than those simple rules would have suggested†(da Costa & Leubsdorf, 2014). Interestingly, Yellen is guided by simple policy rule as well by keeping interest rates low (high), when the economy is operating below (above) its trend. Insteadof stabilizing theeconomy, as this Yellen Rule intends, the unintended consequence is greater forecasting uncertainty, due to nonlinear feedback.  This evolution of forecasterrors can be modeled by applying a Sprott nonlinear dynamical system of financial chaos, perturbed by random noise and shocked by excess demand for real money. It can be proven that a simpler monetary policy rule exists, which prudently improves everyone's forecasts by targeting the long and short-term interest rates to equal the same fixed expectation, which is estimated to be 4%. In this way, the economy can be stabilized.

Monetary Policy; Finance