I don’t want to spend a lot of time on the Fed. I do want to shine a light on its lack of forecasting ability. You have to understand, it is a cheerleader for the U.S. economy, and usually (though not now) a defender of fiscal policy.
The following figures are based off my weighted average estimates taken from the Fed’s guidance.
Let’s start with its forecasts of GDP growth.
Note that GDP estimates have been wildly optimistic, and have come down over time. Why should these people have charge over monetary policy? They don’t show any competence. It’s as if they have one failed theory that they share — neoclassical economics.
Yes, the unemployment rate has come down, but much of it it due to discouraged workers. Also, younger people are having a hard time finding work, while oldsters are having to work to survive.
Now let’s look at the hyper-optimistic PCE deflator:
Inflation has been falling as the PCE measures it, and CPI also. Asset inflation has taken the place of goods and services price inflation. Eventually, that will switch, when the relative need to consume rises, as it did in the ’70s.
Now let’s look at the expectations for the Fed Funds rate:
Fed funds continually moves down over time. The Fed overestimates when it will tighten, because the economy is far weaker than it expected (go back to graph 1). The final graph confirms this:
Thus the futility of the Fed. After almost two years of giving guidance, it is no closer to tightening than when it started. Tightening is 27 months away, if its estimates are right, the same as it thought in January 2012. Tightening seemed further away when more aggressive QE was introduced, but that quickly abated, like a drug addict adjusting to higher doses.
The Fed’s ability to forecast, since it began communicating more under Greenspan, has never been good. It is always too optimistic, and assumes the powers of monetary policy are high, when they are low. This applies double to abnormal policy like QE.
Perhaps the Fed could do us a favor. Stop the shenanigans, and let the yield curve get a normal slope between 2- and 10-year Treasuries, around 1%. Also end QE. Then tell Congress that the ball is in its court, and the Fed won’t do any more “stimulus.” Then Congress would have to face its own shortcomings, and decide if it is Keynesian or Austrian, and act. Congress dallies because the Fed acts. Voters can punish Congress; they can’t punish the Fed, much as it deserves it. If we need a recession to clear away bad debt, so that we can grow again, let’s have it, and stop the asset inflation that the Fed engenders.
As it is, I don’t think QE is doing much good at all for the U.S., unless monetizing the debt is something good, which historically leads to high inflation.