The Collapse Of FOMC Expectations

by: David Merkel, CFA

When do you admit that you are wrong? Do you do it publicly? Do you hide it?

Do you hide it plain sight?

When I look at the graph for Fed funds for 2017 and later, I think the FOMC is admitting that they were wrong for a long time, and now hide that in plain sight.

They don't admit that they were wrong. They don't admit that the economy has proven to be a lot weaker than they ever expected, and that they now expect that to persist for a while.

That's what the graphs for Fed funds and GDP say.

But what does the FOMC say in its statement? It expresses confidence in future GDP robust growth, even though their expectations have collapsed to 2% real growth as far as they care to opine.

Look at the above graph, and see how it has all converged to 2%.

PCE Inflation? They assume it will be 2% before the year starts, and then they adapt to incoming data.

There's no model here, just a disappointed ideology that says they wish to produce a 2% PCE inflation rate, dubious as that goal is.

The only thing more dubious there is their ability to achieve their ideology.

Remember after the financial crisis? There were those who said unemployment would never return to 5% - that the natural rate of unemployment was permanently higher.

I may have been among them.

Well, now the FOMC has a new consensus. Unemployment below 5% as far as they care to opine.

When I look at these graphs, particularly the ones for Fed funds and GDP growth, I see a paradigm shift where Bayesian priors have been dragged kicking and screaming by the data to No Man's Land.

Grudgingly they acknowledge the data in the graphs, but they don't have a theory to go along with it, so their statements and minutes sound the same.

Nothing is changed. Soon our policies will restore robust real GDP growth, produce inflation and then we will tighten policy and restore normalcy.

Well, that's what their minutes and statements say.

But who are you going to believe? The FOMC and their words, or your lying eyes looking at their graphs?

Disclosure: None.