The crappiest of ideas

That´s the ‘dot plot’, conceived by the “Transparency Committee” headed by Janet Yellen while a Governor at the Board.

Interestingly it came ‘on line’ for the first time in January 2012 at the same time inflation hit the target. Since then inflation has mostly trended down. It has done so even while oil prices remained high. Naturally, when oil prices tumbled in mid-2014, headline inflation followed suit.

Dot Plot_1

However, by the time the first dot plot was released in January 2012, the Fed was no longer expecting to chart an exit from stimulus soon. The economy had taken a turn for the worse; in fact, additional bond-buying was on the horizon.

Then-Fed Chairman Ben Bernanke consequently downplayed the dots, a tradition that Janet Yellen continued when she assumed leadership of the Fed at the beginning of last year. At times, the chart—with its 17 disparate projections of the future path of policy—can conflict with the unified message the committee is trying to send.

In her first press conference as Fed chair in March 2014, Yellen told reporters “one should not look to the dot plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large.”

Over the last several quarters, however, the dots have come back down, suiting Yellen’s message that the pace of tightening to follow what would be the Fed’s first rate increase in nearly a decade will be gradual.

So Yellen has turned back to the dots as “Exhibit A” for investors. During her press conference in June of this year, she pointed to it repeatedly when asked about the central bank’s likely course.

Other signs of utter confusion

Dudley in August:

“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley told a news conference Wednesday at the New York Fed.

I really do hope that we can raise interest rates this year, because that would be a sign that the U.S. economic outlook is good and that we’re actually on track to achieve our dual mandate objective,” Dudley said.

Dudley today:

Federal Reserve Bank of New York President William C. Dudley said the central bank will “probably” raise interest rates later this year despite uncertainties over global growth.

Unemployment in the U.S. has fallen to its lowest level in more than seven years, making it harder for the Fed to justify interest rates near zero. Inflation, however, has remained well below the Fed’s target. It was 0.3 percent in the 12 months through August, as measured by the Fed’s preferred gauge of price movements.

Dudley said inflation probably would move back toward the target over time, and that 2 percent was “the right target.”

With the biggest confusion being the view that monetary policy has been accommodative:

“We’ve had so many years of accommodative policy, I think the market is losing faith in the Fed,” said Priya Misra, the head of global interest-rate strategy in New York at TD Securities, one of the 22 primary dealers that trade with the central bank. “You’re not really seeing the impact of policy end up in inflation.”

Which completely misses the logic that “you’re not really seeing the impact of policy end up in inflation” exactly because monetary policy has been anything BUT accommodative!

Looking back, during the Greenspan years monetary policy worked fine. Greenspan was the “anti-transparency”:

 “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant”.

Nowadays we feel like it´s more like a take on George Santayana´s:

Having lost sight of our objectives, we redoubled our efforts.”

Forget interest rates as providing the stance of monetary policy, and look instead at NGDP growth and inflation (remembering that the rising dollar and falling commodity and oil prices are consequences or symptoms of monetary tightening).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s