When I read the latest policy statement coming out of the Fed on Wednesday, I was reminded of how the character Emily Litella from Saturday Night Live would always close out her commentary: “Nevermind.”
Photo: NBC Television; source: Wikipedia.
This is a critical time for the Fed. Their very legitimacy has been called into question. So they’ve been trying to guide the markets, to make sure we aren’t blindsided by a sudden action. Some Fed Ph.D. must have concluded that market volatility is associated with restrictive financial conditions. As a result, they’ve concluded that when it comes to monetary policy, the best surprise is no surprise.
But all this guidance is guiding us in different directions. Last summer they steadily prepared us for a rate liftoff. Then China’s market moves scared them, and they guided rates lower. Then employment growth picked up in the fall, and they guided rates higher, actually achieving liftoff in December. Stanley Fischer got excited, and told the markets that four rate hikes in 2016 was “in the ballpark.”
Now we’re right back where we started from. This time, the drop in oil prices scared the Fed, so they shaded the language in their statement. They said that household spending is moderate, not improving. They took out their “balanced” view of the risks to the economic outlook. And they added that they will watch the data and global markets closely.
Well, of course, the Fed watches the markets and the data. This is news? What’s news is they’re telling us. What’s news is Mr. Fischer had to backpedal. What’s news is the Fed is guiding us lower again. Watching the Fed these days is like watching the surf when there’s been a storm offshore: some waves are big, some are little. It’s hard to tell what’s coming next.
For the past five years, the Fed has been too optimistic about the economy. We’re stuck in a slow-growth, low-inflation cycle, where oversupply keeps the price of everything down. It’s clear that they’ve been “talking their book,” trying to be optimistic. After all, if we all get a little more optimistic, we’ll all spend more, right? Only it doesn’t work that way. We only spend more when we earn more.
If the Fed wants to reduce market volatility, they should be more consistent in their communication. But sometimes the best way to communicate is to stop talking.