FOMC Statement Makes A Statement Without Really Knowing It

Oh, the irony. Recall Janet Yellen’s plight, circa early 2015. Oil prices were “unexpectedly” crashing raining on her recovery-like parade. The Federal Reserve, Yellen as its Chairman, was about to embark on an ambitious program of regular every-meeting rate hikes to head off, its models assumed, the coming inflationary bump which was to confirm full if belated monetary policy success.

What they didn’t quite know was exactly when this would begin.

But in the second half of 2014, the global crude market rudely interrupted all the carefully calculated plans. Worldwide, oil prices tanked in what was wrongly characterized as a “supply glut” simply because Economists and central bankers (same thing) can never fathom monetary policies being so utterly inept and ineffective.

It was the anticipated hand-off; QE3 and 4 begun back in 2012 was supposed to be retired by the end of 2014 (it was) as it achieved its goal, its real goal which was unambiguous economic liftoff (not some ambiguous nonsense about term premiums in Treasury yields) rising inflation rates merely confirm. What should have followed would have been near-immediate rate hikes (recall one of Janet Yellen’s first “mistakes” as Chairman when she took over from Ben Bernanke earlier in 2014 was to say that she figured rate hikes would start about 6 months after the end of QE).

The FOMC always assumes that due to decades of their own good work (forget that whole 2008 thing-y), inflation expectations are and remain firmly anchored at their 2% inflation target. Deviations, therefore, would only ever be temporary, transitory, and transient. Unless, of course, inflation expectations aren’t actually anchored (then you’d have to ask the monetarily uncomfortably question of just what could cause such a circumstance).

In all the modeled projections (above and below), you’ll notice the various econometric models begin by figuring inflation will be right at or near the 2% target – that’s the “anchored” assumption. And then as the projected year itself draws near, the estimates for inflation inevitably take a dive.

And when they do, more often than not it’s been because of crude oil – demand, not supply. The years around Euro$ #3, poor Janet’s liftoff spoiled, were obviously among the larger of the forecast misses (particularly 2015; so much for that short 6-month grace period) because for much of the rest of the world it turned out really, really bad (the US instead merely flirted with the recession just as Yellen’s FOMC voted for its first-rate hike; the embarrassment caused them to put the rest on hold for an entire year).

You could tell something more was amiss, global dollar-wise, by the combination of the oil crash, the rising dollar exchange value, but more so behind it all what really happened on October 15, 2014 (in case you don’t remember, a buying panic in UST’s unambiguously indicating serious collateral problems becoming that much more serious).

But even when oil prices are rising, as they had been in 2018, for example, this has only meant a smaller miss (undershoot). Each and every year starts out believed to be the year to hit or modestly exceed 2%, only to fall some degree short because the FOMC models like the mainstream Economists who pour their subjective assumptions into them can’t figure out why WTI goes up or down nor when and how it does either one.

That’s why 2019 ended up more like 2015-16 than 2018 or 2014; Euro$ #4 showed up, May 29, 2018, reminiscent of October 15, 2014, and wrecked the situation just as Jay thought he had almost reached Janet’s previous threshold.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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