cent chance of rain tomorrow, they were usually pretty close ( graph 2 ). and meteorological models have evolved enormously in sophistication and accuracy since then. graph 2 at first sight, question 3 – ‘ who will win the state of origin rugby league series in 2025? ’ – seems similar to question 2. there are only two possible answers [ 7 ] – and probabilities seem readily available, for instance from betting markets ( graph 3 ). but the similarities are illusory. today ’ s short - term weather forecasts are the product of advanced stochastic modelling that yields well - defined risk measures. but no model can fully capture the huge range of time - varying, ambiguous and judgemental factors that go into determining the winner of a sports series a year out. such processes are said to be subject to ‘ knightian ’ or ‘ radical ’ uncertainty. r e s e r v e b a n k o f au s t r a l i a graph 3 probabilities of state of origin winners implied from betting odds % % favourites nsw queensland underdogs game 1 * game 2 game 3 series probabilities for the 2024 games are calculated using odds prevailing shortly before each game. probabilities for the 2025 series are as of late july 2024. sources : elitebet ; tab. even in the short gaps between this year ’ s games, the quoted odds bounced around like a yo - yo in response to a stream of unpredictable developments – joseph sua ’ ali ’ i being sent off in game 1 ; latrell mitchell ’ s triumphant return for nsw in game 2 ; and the pitched battle of game 3. who knows on what, as - yet unimagined, events next year ’ s series will turn. but it seems likely that the current 60 / 40 odds quoted in favour of nsw reflect excessive confidence that whoever won in 2024 will win in 2025 too, rather than any clear - eyed assessment – a variant of the certainty bias. my final question – ‘ what will elon musk do next? ’ – is a more extreme form of radical uncertainty. key drivers of the true answer – goals, beliefs and motivations – are partly or wholly unobservable ( so - called ‘ latent ’ variables ). and the range of possible answers is unbounded. anyone claiming to have identified a small number of welldefined outcomes, each with a clean probability, is at best ambitious

the analysis i ’ ve seen doesn ’ t get you close to the 9 percent rate we currently are experiencing. the policy loss function the macroeconomics literature often describes the policymaker ’ s problem as one of minimizing societal costs of bad outcomes – which it mathematically approximates by the sum of the squared deviations in inflation from its target and the unemployment rate from its so - called natural rate. it turns out that a conservative and tough - minded central banker should value these deviations about equally. 5 accordingly, an inflation rate of 5 percent against an inflation goal of 2 percent is the same sized loss as an unemployment rate of 9 percent against a conservative estimate of 6 percent for the natural rate of unemployment. today, we are facing an unemployment rate of 9 percent with little prospect of meaningful declines soon and the medium - term outlook for inflation is under 2 percent. this policy framework is often described as flexible inflation targeting. in strict inflation targeting, all policy actions are aimed at hitting an inflation target. in flexible targeting, policymakers balance deviations from both the unemployment and inflation targets. usually, the policy prescriptions from the two targets are not in conflict. above target unemployment is typically associated with muted inflationary pressures, and accommodative policies are appropriate to reduce both gaps from their respective targets. at times, however, conflicts can occur. when they do, a flexible targeter does not accept a large miss in one target in order to hit the other perfectly, but instead accepts moderate misses in both in order to minimize the total loss. a corollary is that any flexible inflation targeter has to accept the idea that optimal policy may involve inflation running for a time above the long - run target if that is a consequence of policies designed to bring unemployment more in line with its target rate. for example, the economy may have experienced some permanent loss of potential output during the recession partly because of reduced capital deepening with lower rates of investment and partly because of other factors. in addition, extended unemployment insurance benefits and difficulties in matching workers with jobs may be temporarily pushing up the natural rate of unemployment. see board of governors of the federal reserve system ( 2011 ). see evans ( 2011 ). bis central bankers ’ speeches policy prescription given the economic scenario and inflation outlook i have discussed, if it were possible, i would favor cutting the federal funds rate by several percentage points. but since the federal funds rate is already near zero now, that ’ s not an option. to