Sunday, February 21, 2016

Where is the Fed’s objectivity?

Objective evaluation of last 2 week’s data
Where is the Fed’s objectivity?

So here is a summary table:

I focus on the RANK of the 12 mo. percent change of all data since May of 2011. We rank each series on its growth over that period. Based on that frame of reference, all monthly reports from the last 2-weeks, average a standing in their 25th percentile. They have been this low or lower since May of 2011 only one –quarter of the time. Price data have been this low or lower 29% of the time. Activity data have been this low of lower 21% of the time. MFG data have been this low or lower 12% of the time. Inventory growth has been this low or lower only 1.8% of the time. U of M sentiment has been this low or lower only 17% of the time.

These all are very weak readings! What the heck is the FED looking at?

Recession signals- Not yet
Does any of this signal recession? No.

The economy is in recession only about 6% of the time. But readings that are in or at the bottom quartile of their range are not reassuring readings. And to be clear the Fed is planning to hike rate with these indicators on weakening trends. That is what is most outrageous and disconnected from reality. It’s not just these levels of the growth rates; it’s the growth plus its momentum. Seven of 20 indicators were lower month to month in their most recent observation. Nine of them are lower year over year. Eleven indicators (out of 20!) are actually below their respective 20th percentiles. Only one is above its 80th percentile – that is real negative asymmetry. These are extremely skewed results – skewed to weakening.

And some these are important reports like industrial production, retail sales, the index of leading indicators, consumer sentiment, the NFIB survey and others. It’s not a collection of dribs and drabs of data.

No wiggle room/No Room To Move Vs the vast expanse of space on the upside
With the Fed having virtually no wiggle room to ease, as this economic slippage continues, it is an outrageously dangerous strategy for the Fed to not at least announce that policy is on hold. The ‘MINI-MAX’ rule says when policy is in an uncertain environment it can be a good strategy to act so as to MINIMIZE the effects of a policy decision SHOULD the wrong policy direction be chosen. Where do you think the Fed stands relative to this rule?

Dead WRONG. But hey, maybe the Fed policy tilt actually is right? Maybe it will draw to an inside straight and all will be forgiven…and then again maybe not. That’s why the ‘mini-max’ rule was developed because…MAYBE NOT.  What is the Fed’s forecasting record like anyway?

There is NOTHING dangerous about slowing the tightening cycle… should the economy continue to grow and if inflation pressures were to mount the Fed has so much room (infinite) to move on the upside compared to almost no room on the downside- there is no risk (Queue John Mayall. ‘Room to Move’ Here).  The Fed is driving close to the edge here...and for what reason? 

Smell the handwriting on the wall…
I find this policy obstinacy an astonishing choice. Especially since GLOBAL forces are pushing BACK at inflation. I have called the Fed dogmatic. Some call it ideological, some say it has hubris. Others call it arrogant. All of these descriptions express frustration with a Fed that refuses to smell the handwriting on the wall (I’m just guessing here that they can’t read it)...

Frustration with the Fed mounts
There is a group of economists –of no particular ideological purity- that is increasingly frustrated with a Fed that embarked on a tightening policy, lacking the justification that it had set for itself to move.

Let’s pretend?
Still, it moved and now it has momentum. A policy choice was made and now the Fed wants to stick to it and it is seemingly reluctant to pause and admit that it may have made a mistake and moved too soon like so many other central banks before it IN THIS VERY CYCLE. Is the Fed really whistling past the graveyard because it thinks it can protect its reputation by compounding one bad decision with another?  This is a high stakes riverboat double or nothing Fed policy gamble, and there is no payoff commensurate with the risk that the Fed is taking. So…why is it doing this? Under most circumstances ‘Let’s Pretend’ is not a policy option.

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