The FOMC tomorrow will tell us at what level they want to price fix the short term cost of money and for how long. This forecast from each individual member will be based on their economic forecasts. While these forecasts will be useful from a market perspective as the Fed’s words alone can influence rates, relying on Fed forecasts as something close to ultimately being accurate has historically proven to be dangerous. For a quick instant replay check over the past 10 years, the Fed believed the US economy was on the cusp of deflation in ’02 thru ’04 and it’s why they lowered the fed funds rate to 1% and kept them there for a full year. This forecast of deflation of course was wrong as one of the great commodity bull markets of all time began in early 1999. We also know this cheap money below the rate of inflation enabled the credit bubble. The other Fed forecast of major consequence was said by Ben Bernanke to Congress on March 28th 2007, “At this juncture…the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” My point is that the extra transparency the Fed will give us today is irrelevant if they get the underlying policy wrong and the chances are they will. It is why the marketplace and the countless number of participants should be setting the cost of money, not trained economists doing so based on their econometric models.

Category: MacroNotes

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4 Responses to “The Fed again brings out its crystal ball”

  1. Futuredome says:

    The FED is irrevelant. The fractional reserve banking money creation machine is broke. They can’t print anymore money. The FED’s ability to get them to print money in loans is gone. The only thing left for the primary dealers is speculating on commodities.

    Capitalism is truly in the crisis stage. They will eventually give up and try to starve the peasants through deflation, bank failures and job loss. What you see now is only the brink. If the liquidationist in the cabal of capital owners win out, then it will come sooner than later. Rollarball society here we come.

  2. Steve Hamlin says:

    “It is why the marketplace and the countless number of participants should be setting the cost of money, not trained economists doing so based on their econometric models.”

    The Fed sets one or two benchmark rates, and the marketplace and countless participants establish yield spreads based on, among other things, their perception of the appropriateness of and knock-on effects resulting from that Fed policy rate. The market place sets the cost of money as it relates to other market factors.

    If market participants think the Fed has it wrong, then spreads will change to reflect that opinion, and if the market thinks the Fed is so far off that mere spread expansion/compression can’t bridge the gap, then the Fed will have to intervene to defend its target, or watch financial intermediation go chaotic.

    How is that different now than before? A zero lower bound adds some complexities to POMO execution, but it isn’t a different theoretical universe.

  3. As I see it, the new interest rate forecasts will serve two important purposes. For consumers, it will warn them that if they wait ’til 2015 to buy a home, a 5-yr mortgage will be 2% higher than today. This will prompt pent-up demand to go to the market in 2012.

    For commerce, the threat of higher borrowing rates down the road will prompt the money on the sidelines to get active sooner than contemplated for projects that include a mix of capital and term loans, bonds, etc.

    Freddy H>