Way back in the mid 90's I began to argue that the Greenspan Fed had lost its bearings. Using a host of seat of the pants indicators, often studied in the tub at Andrea Mitchell's, Greenspan basically pulled the Fed Funds rate out of a hat. In hindsight, people began to plug in numbers to the Taylor rule. The data was far too inaccurate to get it right in with any lead time. Thus, I put the time into an equilibrium model for Fed Funds that could tell me if the Fed was on the wrong track.
The model proved a valuable guide. The Fed was too tight prior to Sept. 11 2001 and too easy and predictable on the way out. By the time Ben took over and hiked 1 more time, the model was neutral. The model says the equilibrium rate for FF today is 30bp. The Fed is rightly pushing rates below that level. As the zero line brings out the "Out of bullets" crowd, Ben and Co. use alternative (quantitative) operations.
The efficacy issue is the big problem. The St Louis Fed showed in a paper before Greenie's failed exit that surprising and over doing were the Fed's best friends. The transparent and trial balloon telegraphing of policy has neutralized its effectiveness. The Fed is not overly accommodating. The push for budget cuts complicates the Fed's job. Operation Twist will create some additional excess reserves (est 60-80 B). If the EZ continues to blunder, the Fed is going to have to print mo' money.