The Guessers Convocation
On Wednesday the socialist central planning agency that has bedeviled the market economy for more than a century held one of its regular meetings. Thereafter it informed us about its reading of the bird entrails via statement (one could call this a verbose form of groping in the dark).
Modern economic forecasting rituals.
A number of people have wondered why the Fed seems so uncommonly eager all of a sudden to keep hiking rates in spite of economic data in Q1 indicating surprising weakness in economic output (of course they once again didn’t hike rates, this time).
We have long suspected that the real reason for the urge to hike is to accumulate “ammunition” for the next downturn. After all, it really shouldn’t make much of a difference where the federal funds rate is; the federal funds market is basically dead anyway, and the Fed continues to refrain from shrinking its balance sheet (i.e., bank reserves will remain elevated, and the Fed won’t actively exert pressure on money supply growth).
Then again, the statement is actually in keeping with the orthodox (largely Keynesian) view of the economy and the central bank’s presumed tasks. There is actually no need to take it at anything but face value. The complete statement can be seen here, but we want to focus on one particular excerpt – which follows an enumeration of various data points in paragraph one:
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.”
(emphasis added)
So why are they saying that? Here is a snapshot of the data points that are held to be important to the Fed – click to enlarge.
If we look superficially at the unemployment rate and the PCE deflator, then the Fed has every reason to hike rates. Its mandated targets have been reached and short term rates remain historically extremely low.
The only seeming fly in the ointment is the “transitory” weakness in GDP. As far as we can tell, there is a consensus on this point that was mentioned in nearly every mainstream financial press article reporting on the FOMC statement. Here is an example:
“First-quarter growth grew at a weak 0.7 percent, but economists expect a bounce back and some see growth over 3 percent.”
Of course, economists always expect a “bounce-back” after a weak quarter – except at the actual bottoms of recessions, which is pretty much the only time when the consensus becomes negative. In essence, such statements are completely meaningless, …read more
Source:: Acting Man
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