I guess it is human nature, at least among aggressive ‘A’ type personalities, to want to try to fix or improve everything. This goes for making a hamburger to running monetary policy for the US. But just because you want to help, does not mean that you can or should try. Especially when it comes to the Federal Reserve Open Market Committee.
I see comments everyday from big name pundits and even small fries like me that suggest that getting in front of the juggernaut that is building from 6 years of zero interest rate policy (ZIRP) is the prudent thing for the FOMC and chair Yellen to do. Well, actually, that may just fall outside of their mandate. Yes they do have a mandate. Here it is if you are not aware (it is okay for Fed Governors to read too).
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
This has been in place for almost 40 years. I traded repo for 10 years before turning to stocks and options and followed them closely. The way they operate has become more transparent but it does not seem to have changed to me. You would think that the financial world would know this by now. Or at least the Fed Governors.
Richmond Fed President, a voting member, stated as recently as yesterday that there is a strong case to raise rates at the June meeting, due to economic growth being strong (he estimates 2.25% this year), growing employment and inflation that is “likely to begin moving back toward 2% this year.” Despite flat or falling prices he believes that the dollar will peak and oil prices will revert higher (none of this shows in the technicals by the way). No need to wait for evidence right? He is a Fed President with a vote, he must be right. He has not been wrong about forecasting growth or inflation before has he? Oh wait.
Reuters covers his comments in December 2012 stating that QE3 would be unlikely to boost jobs and could stir inflation. But hey, that was over 2 years ago. There was also this gem from August 2012 on Benzinga.
Ok, enough picking on Lacker, but the point is that these guys are not any good at estimating anything they measure. So why do you trade off of their speeches like they know what they are talking about?
History shows that on both upward and downward movements in the Fed Funds rate the market makes the move before the Fed comes out and states it. And what does the Fed Funds futures market suggest? No chance of a rate hike in June…..or July or August or September for that matter. That puts the first real chance after the October meeting but probably more realistically into 2016 unless there are repeated large inflationary prints in the PCE, CPI, PPI or deflators. Not one, several, back to back. They will not tighten just to slow the economy, especially with forecasts at only 3% on the high end.
One final thought. Chair Yellen has been telling you what she will do all along. Remember to put your listening ears on when she speaks. When she says possible it means possible, not it will happen. When she says likely then you can start your betting.
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.