I make no apology for what I have now coined exercises in “Rorschach Word-Clouding” when it comes to listening to the so-called “smart crowd” (i.e., The Ivory Tower’ed, Ph.D, Think Tank aficionado set) as to what should be inferred when reading, or listening, to anything coming from the Federal Reserve. And now it’s been proven to be just that. i.e., A de facto, ludicrous, exercise of providing “Forward Guidance.”
This was supposedly “the tool” for helping manage expectations for any, if not all, forth coming monetary policy moves. Well “tool” now seems fitting. So much so, it’s now become worse than a joke. And it seems everyone is beginning to see it for what it is. Albeit rather late.
Just to make my argument a little clearer I stated many moons ago that once the Fed. began focusing on, and making R* (Known as R-Star) deeming it as the actual effect of interest rates (i.e., 1%, 2%, 3 potato four) you now had proof (in my opinion) they had lost control. Because turning the argument for what interest rates were being set at, into offering a theoretical number to be the actual, showed they were grasping at straws to show efficacy and judgement.
Again: The defense for their policy rate stance was turned to now imply that the “rate” doesn’t mean what the number is. It means what they say it is, because in actuality – it’s something different. e.g., R*
If you’re thinking “Wait…What?” Or “Did I just read a different version of what is, is?” That’s right, something you can’t do on your mortgage payment or credit cards. i.e, Self-interpret the rate of interest you’re going to be legally liable for in the real world. Only in the Fed’s world can you do that. Even though whatever empirical rate is set by the Fed. is directly responsible via hard math (e.g., Your rate will be Prime + X) and to be paid by you in the real world.
You just can’t make this stuff up. (Unless you’re a central banker, but I digress.)
But that’s what a Ph.D in economics gets you these days, because it’s now all about R*. i.e., The best theoretical obfuscation tool for sidestepping monetary policy’s real world debacles to come out since sliced bread. Also known as “The neutral rate.” Or said differently: Think “R-Star” when you hear the term “Monetary policy is still accommodative.” That’s the moniker (and reasoning) that allows the stating of that line. Regardless of what it may be doing too the economy.
How often do you hear that line? Hint: After every meeting.
Here’s what I said about this last year in the article “R*: The Rock Star Of Central Banking Lunacy” To wit:
Yes R* assumptions for stability and control-ability can turn into WTF* moments of panicked reality in the blink of an eye. All it takes is one (and just one at that) hiccup and the whole theoretical construct comes crashing down along with all those seeming stable lofty values and assumptions when suddenly – no one trusts who’s solvent, if anyone, regardless.
Whether you’re listening to the Fed. or any other central bank today the immediate response along with their working assumptions hinges around the same presumptive arguments that revolved right before the last crisis. i.e., “We have more tools.” “We’ll do whatever it takes.” “Sometimes you just have to believe.” etc., etc.
This is today’s equivalent by both Central bankers, and their gaggle, intoning words of “surety” much like the mortgage brokers, banks, real estate agents, media and more right before the crisis. i.e., “Relax, you can always refinance.”
Now, add to this construct the following as one tries to gain any, let alone, more insight into what the Fed. is doing, or about to. Ready?
Here’s just one take away from Ms. Yellen’s prepared remarks before her testimony today.
In regards to Monetary Policy. To wit:
“As I noted earlier, the economic outlook is always subject to considerable uncertainty, and monetary policy is not on a preset course.FOMC participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and to their judgments of the associated risks as informed by incoming data. In this regard, as we noted in the FOMC statement last month, inflation continues to run below our 2 percent objective and has declined recently; the Committee will be monitoring inflation developments closely in the months ahead.
In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. However, such prescriptions cannot be applied in a mechanical way; their use requires careful judgments about the choice and measurement of the inputs into these rules, as well as the implications of the many considerations these rules do not take into account. I would like to note the discussion of simple monetary policy rules and their role in the Federal Reserve’s policy process that appears in our current Monetary Policy Report.”
Got that? Sorry, trick question, because if you think you do? Welcome to “Rorschach world” is all I’ll say. Actually, never mind what I say, let’s use the words contained within the prepared statement that appeared directly above that quoted text in regards to the “Current Economic Situation and Outlook” Again, ready? To wit:
“Nevertheless, with inflation continuing to run below the Committee’s 2 percent longer-run objective, the FOMC indicated in its June statement that it intends to carefully monitor actual and expected progress toward our symmetric inflation goal.”
And then, this one:
“Of course, considerable uncertainty always attends the economic outlook. There is, for example, uncertainty about when–and how much–inflation will respond to tightening resource utilization.”
When it comes to the “Ivory Tower’ed” set, or next-in-rotation “smart-crowd” aficionado, the above is just a brilliant summation on just where, when, and how the Fed. intends to proceed once they extract what ever wording contained in the above “word-cloud.”
It’s all hogwash and would never be allowed to be given in any C-Suite worth its salt. I’ll illustrate it below with the following hypothetical inserting Ms. Yellen as the CFO:
CEO: “I now call on the CFO to address the board and give an explanation as to why our current state of affairs, as it pertains to our financial soundness, seems to be going awry.”
CFO: (Insert quoted text above replacing only “FOMC” with “finance department” and “inflation” with “the interest rate being paid on debt being carried by the company as replacements.)
Here’s an example:
CFO: We continued to overpay on our debt because what we believed would happened hasn’t. We thought this was prudent because if what we thought would have happened, did happen, then we would have already been doing what we would have needed to do. But we still believe this will happen, even though the facts show that are assessment has been wrong. But we have faith that maybe we’ll be right in the end, so overpaying and depleting our account balance still appears to make financial sense. We’ll evaluate over the period between our next meeting as long as someone doesn’t throw an unforeseen shock into the mix like calling in one of our notes unexpectedly. For that, we currently don’t know what we’ll do should that occur. But not too worry, because we’ve been assured by our creditors or loan holders we can always “refinance” should things change.
Here’s what you would have heard next after the conclusion of the meeting…
“I would like to present a motion to begin the process of seeking a new CFO to begin at the conclusion of this meeting. Can I Get a second? “Aye!” And with that second all those in favor please signal by saying Aye. “Aye!!!” Those opposed same signal. (Insert crickets here.)
That’s how it works in the real world of business. Why? Because it’s not hypotheticals, ambiguity, and printing presses that you’re playing to help wallpaper over past mistakes. Business – real business – goes out of business if the balance sheet is not correct for the proper reasons or reasoning.
Today, the above only works – until it doesn’t. No matter what the experts “think.” Period.
© 2017 Mark St.Cyr