Fed Predictions

If we did not have money at stake, the various predictions about the Fed would be amusing.  Every day the parade of the pundits on CNBC includes those who talk about what the Fed should do and what the Fed will do.

With a very vew exceptions, most of those offering opinions about what they should do are completely clueless.  I have a new person in my office, a very bright, young almost-graduate from a good local university.  (The Old Prof looks for this sort of person, since I accept the adage that "you can’t coach speed."  We look for bright people who want to show what they can do and then give them the chance.  They have to be friendly and coachable as well, since there is a lot of give and take in our educational process.)  Anyway, she noted that most of those appearing on CNBC seemd to be spouting cliche`s rather than analyzing.  She almost has her finance degree.  The particular commentator had said something about the "pulling away of the punch bowl was ruining our dead cat bounce" so her point was valid.

Since anyone can join in this, let me add a few predictions.

  1. At the beginning of the cycle, the Fed set out to get to neutral, not to slow the economy.  At the time, that might have been 3.5% to 4% on the Fed Funds rate.  Since inflation (using the approved Fed measures) has crept a little higher, neutral is probably now about 5% or a touch higher.
  2. If you understand how the Fed and the staff thinks, and how monetary policy works, you realize that the interest rate hikes have not been a restrictive factor until very recently.  In fact, even today, a top economist was arguing on CNBC today that the rate hikes are still not restrictive.  This is extremely different from the view of many pundits and hedge fund managers (led and exemplified by Doug Kass — a savvy and high-profile guy on Cramer’s site and CNBC).  They have been viewing even the early rate hikes as "headwinds."
  3. Fed policy lags by six to nine months.  They know that, as does any economist.  That means that we are only beginning to feel the effects of Fed tightening, and we’ll see more in the next few months.  This is an expected, predictable slowdown in the rate of economic growth.  It is not a recession or stagflation or whatever else the worrywarts are projecting this week.
  4. No one knows what the Fed’s next move will be, including me.  The reason is that they do not yet know themselves.  They know that it is all data driven, and that there are lags.
  5. Having said all of this about the difficulty of predicting, I would not be surprised to see the Fed pause for a bit to get more information.  This might be accompanied by tough talk, since they want to contain inflationary expectations.
  6. If there is a spike in oil prices, world turmoil, or any number of other bad things that might happen, the Fed will not raise rates and might lower them.

People forget that the Fed has a dual mission that includes economic growth.

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