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?

  1. 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.
  2. 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!
  3. 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
QUESTION: What are the rules or law governing the confidentiality of the monthly jobs reports? When is the report/information released to the media (even though it may be embargoed for a few hours). Are DOL officials or other Executive Branch officials permitted to publicly discuss any information about those reports before they are released to the media and public? Thank you.
ANSWER: Thanks for your question Paul. The Office of Management and Budget directs Federal agencies on the compilation and release of principal economic indicators. Statistical Policy Directive Number 3 designates statistical series that provide timely measures of economic activity as Principal Economic Indicators and requires prompt release of these indicators. The intent of the directive is to preserve the time value of such information, strike a balance between timeliness and accuracy, prevent early access to information that may affect financial and commodity markets, and preserve the distinction between the policy-neutral release of data by statistical agencies and their interpretation by policy officials.
According to the guidelines set forth in this directive, the BLS provides prerelease information to the President, through the Chairman of the Council of Economic Advisers, the afternoon before release of the Employment Situation. Statistical Policy Directive Number 3 is available on .
The directive contains the following language regarding public comment: “Except for members of the staff of the agency issuing the principal economic indicator who have been designated by the agency head to provide technical explanations of the data, employees of the Executive Branch shall not comment publicly on the data until at least one hour after the official release time.”
CES and CPS data are embargoed until the scheduled release date and time. The Federal Reserve has a memorandum of understanding with BLS to obtain specific employment and hours series for manufacturing, mining, utilities, and publishing for purposes of producing estimates of industrial production on Wednesday at 8:00 AM prior to the release. The Council of Economic Advisors receives the news release on Thursday afternoon, the day prior to the release. The Chief Economist at the Department of Commerce and the Secretary of Labor receive the news release at 8:00 on the morning of the release. Members of the press and the staff of the Joint Economic Committee of Congress (if there is a JEC hearing) receive the news release under strict lockup conditions at 8:00 AM on the morning of the release.

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!

Investment Conclusion

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.


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  • brendan July 27, 2012  

    You’re a rational man Mr. Miller.
    Doesn’t it seem the quality of mainstream monetary policy analysis is even worse than other topics? It seems that the consensus view of ACTUAL monetary economists is not even represented in most discussions. Why so bad in this particular area?

  • Vinz Klortho July 27, 2012  

    The FED’s mandates are:
    1) Save the banks, no matter how irresponsible/criminal their behavior.
    2) Allow the govt. to finance itself at affordable rates.
    The other mandates mentioned are for the benefit of the masses so that they allow the FED to continue to exist.
    Read “Secrets of the Temple” if you don’t get it.
    Vinz Klortho

  • alternative investments July 27, 2012  

    We already know what the Fed has as their priority. Save the banks, keep gold price from exploding.

  • oldprof July 27, 2012  

    Brendan — You make a good point. Those with some expertise do get short shrift, although CNBC has some of them on. It is not zero.
    It does seem worse than most areas, although Steve Liesman tries (when not being shouted down).
    Interesting question—

  • oldprof July 27, 2012  

    Vinz — I have my copy handy. Do you want to provide a more specific citation?

  • oldprof July 27, 2012  

    Alt — In a sense, yes. The Fed is responsible for the banking system. Exploding gold prices would signal excessive inflation.
    So you may have it right:)

  • steveo July 28, 2012  

    The fed has plainly admitted that they prop up various markets, including and especially the stock market, although they temper their statement by “just not all markets at once”. That this is even a matter of debate astounds me.
    Rising gold will be a sign of falling dollar and rising fear.

  • John July 28, 2012  

    Many seem to critize the expansion of monetary base by central banks. But couldn’t the central banks just as well shrink the monetary base if too much money becomes a problem?
    I’ve been wondering this every now and then. My logic tells me that the one that has the ability to create money, also has the ability to “destroy” it.

  • oldprof July 28, 2012  

    steveo — As I noted, the Fed sometimes points to market reaction as a measure of their success in helping the economy and/or restoring confidence. This is far different from the routine “Bernanke put” discussion of trader lore.
    Meanwhile, how about an actual citation, preferably something from the meeting transcripts.

  • oldprof July 28, 2012  

    John — You are on target with your thinking. The monetary base has not translated into as much new money as we normally would expect – a low velocity.
    Bernanke has stated that the base can and would be reduced quickly if circumstances changed.
    Good point — and something to watch.

  • The truth July 30, 2012  

    Did Helicopter Ben write this?

  • oldprof July 30, 2012  

    truth — I get many offers for “guest posts” which I routinely reject.
    I might make an exception for BB, but i would have to reveal him as the author!