As I perused many of the financial/business media reports this past week, both broadcast and print, one thing became clear: Not only were the cadre of so-called “experts” and “smart-crowd” guests perplexed about why the Fed. was signaling a rate hike for March. But even some hosts seemed absolutely dumbfounded as to the lack of supporting evidence to be found – anywhere. Case in point…
I was watching a Bloomberg™ program where the host Tom Keene both stated and asked emphatically of one of his guests (Marvin Goodfriend of Carnegie Mellon University) in response to the lack of evidence for another rate hike (paraphrasing):
“I’ve cited Schwartz, Bernanke, Timberlake, Meltzer, and others; all of the summary is a Fed. must wait for the data, they act ex-post. Are we breaking the rules now? And are we now going to have Fed. Members get out front and be ex-ante?”
The response? (again, paraphrasing):
“If what you mean is in the past the Fed. has almost always waited for inflation to become a serious problem before its move? Than I think things are different. It looks like the Fed. is going to move before hand in what we say is “preemptively”, this time to stabilize inflation at 2%.” Then, with a questioning type shrug he ended with the line, “I hope that is the case.”
And there you have it – “Hope” – once again – as a strategy for contemplating the wisdom of any forthcoming Federal Reserve policy. How’s that all worked out in the past is all I’ll ask?
Back in February of last year I penned an article titled, “Forward Guidance: The Road Map To Crazy Town” And in that article I stated the following. To wit:
“As confusing and obtuse many a Fed. dissertation has become. What has been even more confusing too me is the near zealot manner I’ve heard one economist after another state with surety they know, or can interpret, precisely what the Fed. will do next based on what the Fed. has communicated.
It doesn’t matter if it’s some “next in rotation” guest economist, or their own resident “Chief economist.” The inclinations are always the same. i.e., “The Fed. will do this when that happens. And, that has yet to happen. So, those who say one should worry, or think different, just don’t know what they’re talking about and should be ignored.”
The reason why the above is pertinent to today is this: These insinuations were made February of last year when the markets were once again roiling and had just sold off from their (once again) “all time highs” when every Fed. speaker was charging a microphone, camera, or keypad as to calm market fears of any further impending, or even possible hikes. (And this is where chronology gets important) For this was after the nascent recovering from the earlier near death spiral caused only months prior in August when China leveled a Yuan devaluation out-of-the-blue that stopped the Fed. dead-in-its-tracks of jawboning and/or hiking at its upcoming meeting that September.
Does the term “international developments” ring a bell? That was one of the catalysts for solidifying the term’s entering the Fed’s lexicon of ever-growing (and evolving) excuses as to kick-the-can.
For those who may not remember (and my condolences to those who can’t forget) this was the period the Fed. began sending mixed signals (e.g. good cop, bad cop type statements) that it may look seriously at raising at the September meeting. Again, to reiterate, this was 9 months hence from the first hike in nearly 8 years. And the “signaling” coming from the Fed. was just that “signaling” as to express they were considering – not that it was to be taken as a given, but the odds were high.
It appeared (and was demonstrated as a fact) China had to play those odds as detrimental and moved accordingly (August 24th) causing the Fed. to not only backtrack (approximately 3 weeks before the September meeting), but to send more soothing sounds into the ethers than a flock of real doves. Then, once the recovery from that spiral seemed tamed and “all time highs” were once again attained – the Fed. raised in December as expected. The results?
By February those “all time highs” had reversed and taken out the 2015 “all time lows” in weeks, and began to threaten the now moniker’d “Bullard Bottom” made in October of 2014 when Mr. Bullard basically quelled fears from the ever-growing negative feedback loop during that sell-off (aka free-fall) when he openly called for the possible resumption of QE (quantitative easing.)
Again, it was just February of 2016 that the Fed. had to (once again) take to whatever media, event, or publication possible and state emphatically that there was no reasoning as to assume (once again) that they would hike unless the “data” showed otherwise. Hence why I stated in that previous article how the surrogates or “Fed. whispers” also took the airwaves as to quell any idea (even though it was coming from the Fed. itself via good cop, bad cop statements) that “data dependent” meant just that – and the data does not support it – so shut up, sit-down, and keep your mouth shut was their advise.
It would appear if you followed that advice? (You know, from those who say they know and you don’t.) You would now be left as clueless as those that gave it then are today. Because everyone (and I do mean everyone!) is now scrambling trying to fit a narrative (or excuse) as to why, and by what criteria, the Fed. has suddenly jettisoned all the so-called guidance, and data dependency talk it has built up and garnered with an almost religious zeal since Ben Bernanke implemented it in December of 2012.
I can’t make this point forcefully enough:
In a little less than 90 days since hiking for only the second time in 8 years (and after waiting a year between) the Fed. is now hell-bent on making sure that the call for another rate hike is not only possible, but imminent.
And, as to make sure it’s not to be misconstrued – it’s being publicly reinforced by doves, hawks, FOMC voting members, non-voting members, retiring members, and alike.
And last, but certainly not least, sending a final stamp of approval to that understanding via no less than the Chair herself Ms. Yellen, and Vice-Chair Mr. Fisher in unison on the final day before the blackout period for any further Fed. commentary, before the next meeting of March 14/15. Never forgetting – the idea of such a possibility only two weeks ago based on years of so-called “Fed. watching” and “precedent” had the odds of such a move at near nil.
So what changed?
Obviously it wasn’t the data, for even the “experts”, as well as the former Chair Mr. Bernanke would attest otherwise. No, only one thing has changed, and this is where the use of the term “Occam’s Razor” truly becomes useful.
One way to state or use it is the following: “Sometimes the simplest answer – is the answer.” So, using Occam’s Razor: Maybe the reason for such a divergence in Fed. policy signaling is the one everyone dares not utter: Politics.
There is only one “data” point that has changed over the last 90 days. And that change is of a political nature. e.g. The President.
There is nothing in the “data” for a Fed. to swiftly change, in unison, from a dovish “don’t move till you see the white’s of their data sheets” to one hell-bent on showing the talons of doves and hawks alike to “move first – ask data questions latter.”
As I stated back in December of last year in regards to the Fed’s upcoming policy views:
“I implore you not to solely take my word, but to watch the presser for yourself and draw your own conclusions. I believe it’s one of the most forceful expressions made, or conveyed by The Federal Reserve that it may in fact act aggressively via monetary policy should it decide – It (“It” being the Fed.) seems fit. i.e., The implications seemingly being sent are that they’ll decide what a “good” economy is – fiscal implications be damned.”
It would appear I’m the only one not shocked by the recent new-found tone of the Federal Reserve. It was there for everyone to see – if one cared (or dared) to see it for what it was. Then again, I don’t have a Ph.D which is probably the reason why I could, then apply simple reasoning. You know, like Occam.
But what did he know.
© 2017 Mark St.Cyr