Image source: Wikipedia

The key words at the FOMC press conference is “uncertain” for good reason. The Fed doesn’t know what it’s doing.

(Click on image to enlarge)

Image from the Fed FOMC projection materials.

In the FOMC Press Conference, Fed Chair Powell said “uncertain” eleven times. The word guess came up 6 times, some of them by reporters. Here’s an interesting example.

CHAIR POWELL. So I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations, possibly a number of them make sense. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that. The savings rate for consumers has come down a lot. The question is whether that’s sustainable. It could just mean that the date of effect is later. It could also be that for other reasons the neutral rate of interest is higher for various reasons. We don’t know that. It could also just be that policy hasn’t been restrictive enough for long enough. And there are many candidate explanations. We have to, in all this uncertainty, make policy, and I feel like what we have right now is what’s still a very strong labor market, but that’s coming back into balance.

Hoot of the Day

There’s lots of explanations, and some of them may even make sense.

Actually, it’s good that the Fed is uncertain because their expectations have not been close to the mark for a decade.

The above chart is particularly amusing. The Fed has only a 70 percent confidence level that interest rates three years from now will be in the range of of 0 to 5.5 percent.

That means the Fed expects that 30 percent of the time, rates will be outside that range.

From 2012 to 2019 the Fed kept producing interest rate charts showing hikes that never happened.

Then the Fed decided it was necessary to make up for the lack of inflation.

Need to Make Up For Lack of Inflation

Seeing a lot of inflation-related tweets...

Don't forget to thank the folks at the @federalreserve who've been trying for years to spike your cost of living. pic.twitter.com/W67bBgr8Wq

— Rudy Havenstein, Inflation-Truther. (@RudyHavenstein) July 24, 2021

St. Louis Fed James Bullard “It would take a decade of above 2.5 percent inflation to make up for 5 years of shortfall“

At these press conferences, no reporter ever asks tough questions about blatant stupidity like that.

Fed Suddenly Less Certain

This change can be seen in the FOMC's 'central tendency' measure of the longer run federal funds rate. The uncertainty surrounding it has also risen as seen in the wider bands. https://t.co/GOw6J6ASbd pic.twitter.com/YSDQ1IB01J

— David Beckworth (@DavidBeckworth) September 22, 2023

Uncertainty didn’t just widen, it exploded.

With that, let’s review one of my favorite posts ever, The Fed Uncertainty Principle, written on April 3, 2008.

That was before the collapse of Lehman and Bear Stearns and all the hell that ensued.

Recall that Fed Chair Ben Bernanke denied there was a housing bubble.

Fed Uncertainty Principle

The Observer Affects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.

Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.

Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

The Fed has blown two major asset bubbles, never saw a recession, and wanted to make up for the lack of prior inflation when it does not even know what inflation in.

Now they give forward guidance on their thinking and all the banks front-run it, which partially explains the collapse of Silicon Valley Bank.

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