Looking Backwards at the FOMC Meeting
I posted three times on the Fed today over at RealMoney.com. Here are two of the more important posts:
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David Merkel |
| Since the Last FOMC Meeting | ||
| 10/31/2007 12:28 PM EDT |
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The FOMC will likely cut 25 basis points today and leave a “growth risk” assessment in place. That’s what the market is expecting; anything different from that will drive any market surprise. At 50 basis points, the dollar tanks, implied inflation rises, the yield curve steepens and the stock market rallies, at least temporarily. With no cut, the dollar rises, implied inflation falls, the yield curve flattens and the stock market falls, at least temporarily. Well, let’s watch the furor at 2:15. If we get 25 bp, there should be noise, but not much movement to the close. Position: none — happy Reformation Day! |
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David Merkel |
| Correction | ||
| 10/31/2007 3:34 PM EDT |
The FOMC vote was not unanimous. Governor Hoenig felt no change was needed. So what has happened so far?
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All in all, a market that fears inflation to a degree, but is not worried that much about growth. Position: none |
Okay, I got the growth risk assessment wrong, but largely, my analysis of FOMC action has been on target. As for my post yesterday that got a bit of play over the web, I would just like to clarify a few things. First, my view does not imply permanent easing of Fed policy. Quite the contrary, I am an advocate of a flattish yield curve under ordinary circumstances, because it restrains speculation, and tends to preserve a sound currency. That said, if one has to deviate from my baseline policy, don’t waste time getting to your policy goal, because slow adjustments merely put off the time when the cumulative adjustment is enough to matter.
As for the inability of anyone to call turning points: true enough, unless you’re ECRI — maybe we can outsource monetary policy to them. But the idea of having a central bank presumes their ability to spot turning points, and take action. If they can’t do that, let’s simplify the system, and move back to a currency board or a gold standard. Let’s take monetary policy out of the hands of politicians, and those whom they appoint, and put it back in the hands of the free market, if they can’t pick turning points.
As for the Federal Reserve being affected by politicians, perhaps Volcker was an exception, but during the Carter and Nixon years, the White House successfully attempted to influence policy. Greenspan admits to being influenced on policy decisions by the White House as well. If we need more proof, look at the prior loosening cycle, where the rates went far lower, and stayed abnormally low far longer than a policymaker following the Taylor Rule would have done.
PS — I am a fan of Dr. Jeff Miller, though we likely disagree on issues like this. His addition to the commentary over at RealMoney.com is a real plus for the site.
November 1st, 200710:02 am at
although this is the day that I was born, upon a change in character came a change in the name of the day… Happy Reformation day to you too.
November 1st, 200712:14 pm at
ECRI has said that the one thing that could mess up their predictive ability is if policy-makers act based on their forecasts. Consensus forecasts are probably not useful for predicting GDP, but the ECRI approach of calling turning points appears to be more achievable. Since the S&P500 is one of their leading indicators and they need all leading indicators to turn down for a recession call, that doesn’t mean you can necessarily profit off their recession calls though.
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QUESTIONER: I’m Prakash Loungani of the IMF. Isn’t there a danger that you’re sowing the seeds of your own failure? As your work becomes more known, each time you say there’s a danger of recession, everybody will start acting on your information and advice and what you predict will then not happen.
MR. BANERJI: Certainly in theory self-falsifying prophecy is possible. But I think we have a very long way to go before people are following us that closely. Most people will not do as we suggest. At least for the foreseeable future I don’t see that risk very much. I think that risk is more likely to the extent that policymakers follow what we are looking at, because they are in a position to take preemptive steps to avert the very outcome that we may be predicting. That could ruin our record, but that would be okay with us. So I think for the time being, it is really not as much of a risk.
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http://www.imf.org/external/np/tr/2005/tr062305.htm
November 2nd, 20074:00 pm at
Thanks, David.
Not much is learned in conversations where everyone is in complete agreement.
I think it would be interesting if those who did a critique of forecasting actually tried it themselves for a while. It could be on anything, but there would have to be enough cases for them to reach a personal verdict. It would be especially good if the thing to be predicted had about a 20% chance of happening!
I like the ECRI and always pay attention to their comments, but I am not sure there are enough comparable recession cases to form any conclusions.