Four Common Mistakes about the Fed
The Fed is a favorite target for the financial punditry. Anyone can and does join in, offering ideas that are completely without evidentiary support. Meanwhile, there is plenty of factual information about the Fed, but it is widely ignored.
Here are four common mistakes that you frequently see in the commentary from the pseudo-experts. These blunders are so widespread that it is pointless to cite a specific source.
The Fed is Sidelined by the Upcoming Election
This one is a persistent theme among those who have absolutely no special knowledge or experience. Many pundits analyze government organizations by pretending that the policymakers are a small group with a strong common motive and the ability to act in secret. They basically take their own limited experience about how the world works and assume that they can explain government actions that way.
One reporter from the floor recently reported the latest convoluted notion: The FOMC would not act at next week's meeting, but would instead delay so that the positive effect of its policy action would not occur before the election.
That is really deep! Some of the same sources show a chart that quite liberally changes the dates of Fed policy to correspond to market moves. In some cases the move occurs at the first hint of a policy change. This is completely inconsistent.
The Fed Acts Based Upon the Stock Market
One commentator recently opined that the Fed would not act right now because the stock market was not really threatened. The Fed would wait until there was a serious selloff to use its few remaining bullets — maybe 1100 in the S&P.
In fact, there is absolutely no evidence that the Fed acts to prop up the stock market. The Fed behaves in line with a dual mandate for stable prices and low unemployment. With prices not a threat, the emphasis is on economic growth.
There is a source of confusion — the Fed embraces the stock market as one source of how well they are doing on the economy. While the objective is not directly to support stock prices, a successful economic policy would have that result. The occasional reference to higher asset prices is pounced upon by conspiracy buffs.
How can we tell the difference?
- We could listen to Bernanke's testimony, where he has repeatedly stated the economic objectives — and also that the political circumstances are not a factor.
- We could go to the official transcripts of the meetings, now available for many years and extending up to 2006. These are full transcripts. If someone wants to assert political or stock motivations, let him find the evidence in the actual record. Put up or shut up!
- Forget the stupid conspiracy notion. The FOMC meetings have many participants, some of whom would be happy to report any secret moves.
The Fed is Out of Ammunition
A popular theme is that the Fed can do little more because short rates are already at near-zero levels and the perception is that the effect of asset purchases has been reduced.
It is difficult to discuss an erroneous viewpoint without specifying a source, and I do not want to create a straw man. With this in mind, the Fed critics — who have been on the job for years — did not imagine any of the current actions either. The "out of bullets" meme is many years old. Why should we believe them now?
Instead, you could look at commentary from an actual authority, a former Vice-Chair of the Fed. Alan Blinder, writing in the WSJ, offers five different ideas that the Fed could use. Any of these surprises could catch traders leaning the wrong way.
The Fed Knows the Employment Data
This is a bonus item. I predict that whatever the Fed does next week, the talking heads will speculate that it is based on an early read from the employment report.
This idea is completely false, and contravenes official regulations. The President gets an early look on Thursday afternoon (via the Council of Economic Advisors) and the Fed gets a few data points to help with their Wednesday release on Industrial Production.
That is all!
This was a specific question in a BLS webinar that I attended two years ago. Here was the answer:
Angie Clinton (BLS-CES):
Submitted via e-mail from Paul: Question
Friday June 4, 2010 11:01 Angie Clinton (BLS-CES)
This is quite authoritative, and you will definitely not see it anywhere else. My fearless forecast is that the conspiracy buffs will be in action on this next week!
The basic conclusion for investors is a familiar one for readers of "A Dash." There is no substitute for finding actual experts and sources. Accept no substitutes!
Bernanke will act if additional economic weakness indicates the need. He will not have advance info on the employment report, so Fed action might not occur at the upcoming meeting. While it may be fun to speculate on conspiracies and politics, this is not the path to a profitable investment.
Fighting central banks is a losing proposition for investors.