The Tyranny of Norms

Will the economy ever get back to normal?

Source: New York Fed

Fed officials keep telling us what they want. But that’s not their job. The Fed was established to support the banking system—to serve as bankers to the bankers. Part of that job involves managing bank reserves, the money supply, and short-term interest rates. The 1978 Humphrey-Hawkins legislation specifically instructed the Fed to pursue two goals: full employment and price stability. This is sometimes called the Fed’s “dual mandate.”

So it is understandable that policy-makers would look at developments in the economy positively or negatively, based on whether they represent progress towards reaching these goals. If you listen carefully to what they say, however, you can learn a lot about the FOMC members’ plans, intentions, and expectations – beyond these narrow confines.

They talk about positive and negative developments in the economy, in the markets, about what policy should do, and where they want interest rates to go. This is understandable—economic statistics represent financial reality for hundreds of millions of people. When the economy goes south, our plans and hopes and dreams may have to change. No one wants to see others suffer because of policy errors.

But it’s dangerous for officials to discuss where the economy “should” go, about what they “want” policy to do. The wish is father to the thought, as Shakespeare wrote. By saying what they want, Fed chieftains constrain what they might be able to do. And hindsight bias means that they are at risk of finding what they’re looking for in the data—whether it’s really there or not.

The economy we see is the economy we have, whether the leaders gathered at Jackson Hole this week want it to be that way or not. We may all hope that things get back to normal—whatever “normal” means. But this isn’t Oz: we can’t just click our heels together and wish our way home.

Photo: Chris Evans. Source: Wikimedia

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:46+00:00 August 24th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment