The Essential Federal Reserve

Has the Fed become irrelevant?

FOMC Meeting. Public Domain. Source: Philadelphia Fed

In case you hadn’t noticed, the Fed is raising rates today. We’ve come a long way from the rock-star Greenspan era – where observers tried to guess which way Fed policy was headed by the girth of The Great One’s briefcase, and markets hung on his every word. Now, with quarterly dot-plots and press conferences, we’re awash in information. By trotting out Fed Governors and Presidents at every opportunity to give interviews and speeches and guide the market’s expectations, the Fed has made their meetings and statements almost an afterthought.

To a certain extent, that’s the way it should be. Surprising the markets might give Fed members a sense of power and pride, but it doesn’t do much to help the economy allocate capital more efficiently, or to spur innovation and growth. Yes, there is a problem when the Fed becomes too predictable: markets front-run their actions and gradual change becomes impossible. But gone are the days of Fed “shock and awe,” where surprise money-desk activity catches traders leaning the wrong way. Now analysts mostly argue over the pace of rate hikes — not their destination, and certainly not their direction. It’s the economic equivalent of Scholasticism: how many rate hikes can dance on the head of pin.

14th Century Fed Press Briefing. Source: Wikipedia

So don’t expect any surprises today. The market has priced in three rate hikes per year for the next three years, which is pretty close to the median projection on the Fed’s “dot plot.” Unemployment now stands two tenths of a percent above the Fed’s long-term goal of 4.5%, and core PCE inflation is only three tenths below the Fed’s target of 2%. The Fed’s dual mandate is to assure full employment and price stability. The only Fed action that might spook this market would be for Janet Yellen to hold her press conference under a “Mission Accomplished” banner.

Source: Global Market Drivers

Douglas R. Tengdin, CFA

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