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A Look Inside the Minds of the FOMC

Posted on 17 March 2016 by David Merkel

Doing nothing never did more. 😉 ?Time for the quarterly examination of the composite views of the Federal Open Markets Committee, along with some choice comments on its chief partner-in-crime, the ECB. ? Ready? ?Let’s go!

Now, I promised a look inside the?minds of the FOMC, and hypothetically, that what this will be. ?To begin that, you have to recognize the four regularities of FOMC forecasts, as they might think about it:

We overestimate GDP growth
We underestimate labor unemployment
We overestimate PCE inflation
We overestimate the Fed funds rate

You might ask why they think that way, and if you administered the truth serum, they might say: “We believe the neoclassical view of macroeconomic theory. ?We know?that Fed policy will work, and so we act like we are in control, when we are something in-between being Sorcerer?s apprentices and clinically insane.? We keep doing the same thing and expect a different result.”

Okay, some of that last bit wasn’t fair, at least not fully. ?There *are* some processes where until you do a critical amount of effort, the expected result doesn’t happen. ?But textbook monetary policy isn’t supposed to be that way.

So, take a look at the above GDP predictions graph. ?The “slope of hope” points downhill as the economy does not grow as quickly as they thought it would, given all of their efforts.

The unemployment was similar, except here, they weren’t optimistic enough. ?As it is, they expect unemployment to remain low for a long time, at about the levels that it is now. ?Now, how likely is it for unemployment rates to remain stable for three years? ?Not that likely.

You can almost hear them thinking, “Inflation will come back to 2%. ?After all we’ve been so loose for so long. ?There’s no way it should remain so low when we are creating credit left, right, up, down, forwards and backwards.” ?But then, it doesn’t come — it always stays low. ?Their long run view stays stubbornly at 2%, unlike other views where they let it drift, and that’s because 2% inflation is the religion of the Fed! ?It is the Holy Received Goal, that proper monetary policy will create.

But sometimes they wonder, when it’s dark at night and quiet, “What would it take to create inflation? ?What?”

Finally, they all know that the Fed funds rate will rise. ?It can’t stay low forever, can it?

Behind it all is the nagging worry: “Why doesn’t economic activity pick up?! ?We’re doing everything we can short of doing a helicopter drop of money! ?That has to be enough! ?We don’t want to go to buying investment grade corporates or negative interest rates like that basket-case, the ECB, at least not yet. ?C’mon grow! Grow!”

Note that for each quarter the FOMC has given its projections recently, they have thrown a quarter-percent tightening out the window. ?That’s how overly optimistic they are in setting estimates of future policy.

Leave aside the fact that various risk assets in fixed income land are now flying. ?High-yield isn’t doing badly, but emerging markets debt is taking off — note $EMB which has recently broken its 200-day moving average.

Conclusion

Bad theories beget bad policy tools, which in tern begets bad results. ?The FOMC needs an overhaul of its theories, so that it stops creating speculative bubbles, and learns to be happy with an economy that just muddles along. ?And who knows? ?Give savers a fair rate of return, and maybe the economy will grow faster.

Redacted Version of the March 2016 FOMC Statement

Posted on 16 March 2016 by David Merkel

Comments

Policy continues to stall, as the economy muddles along.
But policy should be tighter. Savers deserve returns, and that would be good for the economy.
The changes for the FOMC?s view is that GDP, inflation, and labor indicators are stronger, and business fixed investment weaker.
Equities rise and bonds rise. Commodity prices rise and the dollar falls.
The FOMC says that any future change to policy is contingent on almost everything.
The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain?t moving rates up much, absent much higher inflation, or a US Dollar crisis.

Financial Market Liquidity Isn’t That Important for the Economy as a Whole

Posted on 12 March 2016 by David Merkel

Photo Credit: Ricardinyo || Secondary Markets are *not* the gears of the capitalist economy

Note to all of my readers before I start on my main topic: on the morning of 3/12?I give a talk to the American Association of Individual Investors in Baltimore. ?If you want to see my slide deck, here it is.

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Okay, time for some secular economic and financial heresy, which is always somewhat fun. ?Secondary market liquidity isn’t very important to the functioning of the general economy of the capitalist world, including the US. ?(That said, my exceptions to this statement are listed here.)

Finance has an important role in the economy, aiding business in financing the assets of the corporation, and most of the value of that comes from the debt and/or equity financing in the primary markets, or from loan granted by a bank or another entity.

After the primary financing is done, the company has the cash to enter into its projects and produce value. ?Then the stocks, occasionally?bonds, and rarely bank loans issued trade on the secondary markets if they trade at all. That trading is:

A lot of noise
A zero-sum or negative sum game
sometimes important for future capital raising
and we pay too much attention to it

The real action of value creation goes on in the companies — occasionally secondary market investing, through activists, M&A, etc., may find ways to realize the value, but the value was already created — the question was who would benefit from it — management or shareholders.

If you are investing, choosing assets to?buy is the most important aspect of risk control. ?Measure twice, cut once. ?Yes, secondary trading may help you do better or worse, but only if the rest of the world takes up the slack, doing worse or better. ?There is no net gain to the economy as a whole from trading.

I grew up as a portfolio manager for a life insurance company. ?Many assets were totally illiquid — I?could not sell them without extreme effort, and only interested parties might want to try, who knew as much or more than?me. ?Ordinary bonds were still largely illiquid — you *could* trade them, but it would cost you unless you were patient and clever. ?In such an environment you made sure that all of your purchases were good from the start, because there was no guarantee that you could ever make a change at an attractive price.

My contention is that most if not all financial institutions could exist the same way, rarely trading, if they paid attention to their initial purchases, matched assets and liabilities, and did not buy marginal securities. ?Now some trading will always be needed because individuals and institutions need to deploy new cash and raise new cash to meet expenditures.

But I would not give a lot of credence to those in the banks who complain that a lack of liquidity in the financial markets is harming the economy as a whole, and as such, we should loosen regulations on the banks. ?After all, liquidity used to be a lot lower in the middle of the 20th century, and the economy was a lot more perky then.

Don’t let finance exaggerate its role in the economy. ?Is it important? ?Yes, but not as important as the financial needs of the clients that they serve. ?Don’t let the tail wag the dog.

Trying to Cure the Wrong Disease

Posted on 5 March 2016 by David Merkel

Caption from the WSJ: Regulators don?t think it is the place of Congress to second guess how they size up securities. Fed Chairwoman Janet Yellen said recently that legislation would ?interfere with our supervisory judgments.? PHOTO: BAO DANDAN/ZUMA PRESS

Catch the caption from the WSJ for the above picture:

Regulators don?t think it is the place of Congress to second guess how they size up securities. Fed Chairwoman Janet Yellen said recently that legislation would ?interfere with our supervisory judgments.?

Regulators are not required by the Constitution, but Congress, perverse as it is, is the body closest to the people, getting put up for election regularly. ? Of course Congress should oversee financial regulation and monetary policy from?an unelected Federal Reserve. ?That’s their job.

I’m not saying that the Congressmen themselves understand these things well enough to do anything — but that’s true of most laws, etc. ?If the Federal Reserve says they are experts on these matters, past bad results notwithstanding, Congress can get people who are experts as well to aid them in their decisions on laws and regulations.

The above is not my main point, though. ?I have a specific example to draw on: municipal bonds. ?As the Wall Street Journal headline says, are they “Safe or Hard to Sell?” ?For financial regulation, that’s the wrong question, because this should be an asset-liability management problem. ?Banks should be buying assets and making loans that fit the structure of their liabilities. ?How long are the CDs? ?How sticky are the deposits and the savings accounts?

If the maturities of the munis match the liabilities of the bank, they will pay out at the time that the bank needs liquidity to pay those who place money with them. ?This is the same as it would be for any bond or loan.

If a bank, insurance company, or any financial institution relies on secondary market liquidity in order to protect its solvency, it has a flawed strategy. ?That means any market panic can ruin them. ?They need table stability, not bicycle stability. ?A table will stand, while a bicycle has to keep moving to stay upright.

What’s that you say? ?We need banks to do maturity transformation so that long dated projects can be cheaply funded by short-term savers. ?Sorry, that’s what leads to financial crises, and creates the run on liquidity when the value of long dated assets falls, and savers want their money back. ?Let long dated assets that want debt financing be financed by REITs, pension plans, endowments, long-tail casualty insurers, and life insurers. ?Banks should invest short, and use the swap market t aid their asset liability needs.

Thus, there is no need for the Fed to be worrying about muni market liquidity. ?The problem is one of asset-liability matching. ?Once that is settled, banks can make intelligent decisions about what credit risk to take versus their liabilities.

In many ways, our regulators learned the wrong lessons in the recent crisis, and as such, they meddle where they don’t need to, while neglecting the real problems.

But given the strength of the banking lobby, is that any surprise?

A World Deep in Debt…

Posted on 27 February 2016 by David Merkel

Photo Credit: Friends of the Earth International || Note: the above is just a photo to illustrate a point. I do not endorse debt cancellation under most coircumstances — Photo Credit: Friends of the Earth International || Note: the above is just a photo to illustrate a point. I do not endorse debt cancellation under most circumstances. ?I do support debt-for-equity swaps to delever the system.

Debt, debt, debt…?debt is kind of like a snowflakes. ?A single snowflake is a pretty star, but one quintillion of them is a horrendous mess. ?In the same way, most individual debts are reasonable and justifiable, but when debt becomes a pervasive part of the economic system, the second order effects kick in:

As fixed claims grow relative to equity claims, the economy becomes less flexible, because many are counting on the debts for which they are creditors to be paid back at par.
Economies that are heavily indebted grow slower.
Central banks following untested and dubious theories like QE and negative interests rates try help matters, but end up making things worse. ?(Gold would be an improvement. ?Just regulate the solvency of banks tightly, which was not?done in cases where?the gold standard failed.)
Political unrest leads to dubious populism, and demands for debt cancellation, and a variety of other quack economic cures.
The most solvent governments find high demand for their long debt. ?Long-dated claims raise in value as inflation falls along with monetary velocity.

Thus the mess. ?Bloomberg had an article on the topic recently, where it tried to ask whether and where there might be a crisis. ?I’ve argued in the last year that we shouldn’t have a major crisis in the US over domestic debts. ?There are a few areas that look bad:

Student loans
Agriculture loans
Corporate debts to speculative grade companies that are negatively affected by falling crude oil and commodity prices.
Maybe some auto loans?

But those don’t add up to a debt market in trouble as when residential mortgages were on the rocks.

But what of other nations and their debts, public and private?

Tough question.

That said, the answer is akin to that for a corporation with a tweak or two. ?It’s not the total amount of indebtedness versus assets or income that is the main issue, it is whether the debts can continue to be rolled over or not. ?A smaller amount of debt can be a much larger problem than a bigger amount that is longer. (point 2 below)

Take a step back. ?With countries there are a variety of factors that would make skeptical about their financial health:

Large increases in indebtedness
Large amounts of short-term debt
Large amounts of foreign currency-denominated liabilities (also true of the entire Eurozone — you don’t control the value of what you will pay back)
A fixed, or pseudo-fixed exchange rate (versus floating)
A weak economy, and
Debt and/or debt service to GDP ratios are high

The first point is important because whatever class of debt increases the most rapidly is usually the best candidate for credit troubles. ?Debt that is issued rapidly rarely gets put to good uses, and those that buy it usually aren’t doing their homework.

Under ordinary circumstances, this would implicate China, but the Chinese government probably has enough resources to cover their next credit crisis. ?That won’t be true forever, though, and China needs to take steps to make their banking system sound, such that it never generates losses that an individual bank can’t handle. ?Personally, I doubt that it will get there, because members of the Party use the banking system for their own benefit.

Points 3, 4, and 6 deal with borrowers compromising on terms in order to borrow. ?They are stretching, and accepting?terms not adjustable in favor of the debtor, or can be adjusted against the debtor. ? If you control your own currency, these problems are modified, because of the option to print currency to pay off debt, and inflate problems away. (Which creates other problems…)

By pseudo-fixed interest rates, I take into account countries that as neo-mercantilists make policy to benefit their exporters at the cost of their importers and consumers. ?These countries fight changes in the exchange rate, even though the exchange rate may technically float.

Point 5 simply says that there is insufficient growth to absorb the increases in debt. ?Economies growing strongly rarely default.

Conclusion?

My view is this: the next major credit crisis will be an international one, and will involve governments that can’t pay on their debts. ?It won’t include the US, the UK, and certainly not Canada. ?It probably won’t involve China. ?Weak parts of the Eurozone and Japan are possibilities, along with a number of emerging markets.

And, as an aside, if?this happens, people will lose faith in central banks as being able to control everything. ?I think the central banks and national treasuries will find themselves hard pressed to find agreement at that time. ?QE and negative interest rates might be controllable in a domestic setting, but in an international framework, other nations might finally say, “Why would I want to get paid back in that weak currency?” ?(And what holds that back now is that virtually all of the world’s currencies except gold are involved in competitive devaluation to some extent.)

My advice is this: be careful with your international holdings. ?The world may be peaceful right now, and everyone may be getting along, but that might not last. ?Diversification is a good idea, but don’t forget that there is no place like home, unless the crisis is in your home.

On Investment Charlatans

Posted on 12 February 201613 February 2016 by David Merkel

Photo Credit: Alex Proimos || A bunch of con men attempt to bilk an unsuspecting lady

There are many ways to try to cheat people in the investment world. ?You can promise them:

No risk (an appeal to fear)
High returns (greed)
Secret knowledge (can appeal to either or both fear and greed)
An easy life, free from the worries common to man.
And more…

For virtually every human weakness or sin, there is a road to cheating men. ?This is why it is difficult to cheat a truly honest man, because an honest man is:

Industrious — he knows most ways to improve his lot in life involve considerable work, whether physical or mental.
Skeptical — he knows not everyone is honest, and there are many that pursue ways that harm themselves or others.
Self-controlled — he doesn’t need to become wealthy, but if it comes bit-by-bit, he can handle it.
Unafraid — he doesn’t scare easily, and there are many purported scares out there. ?There are always people trying to make money off of apocalyptic scenarios. ?(Believe me, in a truly apocalyptic scenario, where the government breaks down, or you lose a war on your home soil — no one wins. ?And, there is no way to prepare.)
Studious, and has wise?friends — he doesn’t quickly buy novel reasoning, or unfamiliar concepts without testing them, and running them past his personal “brain trust.”
Patient — he can’t be rushed into something, and he can walk away.
Virtuous — when he does commit, he holds to it, and makes good on what he promised. ?He expects the same of others, and does not deal with those of bad reputation.

There’s more, and I don’t hold myself out to be perfect here, but that is a part of what I aim for. ?If you are like this, you will be very difficult to cheat.

With that wind-up, here is the pitch: I ran across a video while doing my usual work, when I saw a picture of Buffett. ?Now, everyone wants to invoke Buffett because he is a genuinely bright guy on all affairs affecting money and wealth. ?Many who do so twist what Buffett has done for their own ends. ?You can see the graphic used to the left.

So this guy posits that Buffett got rich off of “Guaranteed Income Certificates.” ?You can listen to the whole 39-minute video, and never learn what a?Guaranteed Income Certificate is. ?This is a tactic to make you think that the video-maker has hidden knowledge. ?He does not lie, per se, but dances around what it is and how Buffett has used them. ?I figured out what he was talking about in a about two?minutes, but only because the language was so discursive, with many rabbit-trails.

So what is the vaunted?Guaranteed Income Certificate?

Preferred stock.

Preferred stock?

Yes, preferred stock, that hoary creation that gets wiped out when most firms go into bankruptcy. ?There are few cases where the preferred stock is worth anything in a crisis. ?It is far from guaranteed. ?It has all of the disadvantages of a bond, with none of the countervailing advantages of common stock, which can provide strong returns.

Geek note: why is preferred stock called preferred? ?Three, maybe four reasons:

Its dividend payment can only be unpaid if the common dividend is unpaid first. ?It has a dividend payment priority.

If the dividend is eliminated, preferred stockholders as a group typically gain representation on the Board of Directors.

In bankruptcy, they receive preference over the common shareholders when the company is recapitalized or liquidated. ?That said, in bad scenarios, their claim is the second lowest of all claims — behind the secured creditors, the government, lawyers, general creditors, bank debt, and unsecured bonds. ?Believe me, that preference on common shareholders is not a big protection.

The preferred dividend is usually, but not always higher than the common dividend.

All preferred stock is is a promise to pay dividends if the company can do so without going broke, and ahead of the common shareholders. ?Like all risky investments, you can lose it all. ?Average recovery in bankruptcy for?preferred?stock is?around 5 cents on the dollar, versus 40 cents for most bonds,and 80 cents on bank debt.

Now, Buffett has done some clever things with preferred stock that is convertible into common stock, or alongside common stock or warrants. ?Occasionally he has bought some regular preferred stock as an income vehicle for his insurance companies. ?But Buffett almost never plays merely for income, he wants the gains that come from stocks.

Now, I didn’t listen to the whole video — after five minutes of the beautiful voice dancing around the issue, I stopped it, right clicked, downloaded it, and went?to the end. ?As is common with these sorts of videos, it makes it sound easy, as if infinite income could be yours if you just buy this service. ?They sell you on what your dream life will be like: you will have more than enough money for vacations, you’ll never have to work again, you can spend as much time visiting the faraway grandchildren…

The guy who put the video together, and sells his service, was big on hiding things behind new names that he concocted:

Preferred stock becomes Guaranteed Income Certificates
Venture Capital / Private Equity becomes Doriot Trusts
Master Limited Partnerships?become Secret Oil income Streams
Royalty Trusts are treated as a novel investment, rather than the backwater that it is.

The presentation is also expert in lying with true statistics, making the ordinary sound extraordinary. ?It also has the “but wait, there’s more!” pitch, where they throw in a bunch of old reports to make the deal seem sweeter. ?The cost of the newsletter if saved for the very end — beware of those that won’t tell you the cost up front. ?Good deals will always show you the price early. ?Charlatans hide the price.

There are no secrets. ?There is no easy road to an easy, wealthy life. ?I want to end this post ?the way I ended a similar post called “On the 770 Account,” which was a code name for permanent life insurance. [Sigh. ?Oddly, that post still gets a lot of hits, probably because no one has stepped forward to call that one out.]

Final Note

THERE ARE NO SECRETS IN MONEY MANAGEMENT! ?THERE ARE NO SECRETS IN MONEY MANAGEMENT! ?THERE ARE NO SECRETS IN MONEY MANAGEMENT!

There is no secret club. ?There are no secret formulas. There are a lot of clever lawyers, accountants, and actuaries that the wealthy employ, but for average people, the high fixed costs won?t make it work.

If you want to be wealthy, you have to run your own firm, run it well, providing value to many. ?Don?t listen to those who say they have an easy way to wealth. ?They are lying, and are looking to make money off of you. ?Those who give you free advice are using you in some way. ?(Wait, what does that make me to be? Sigh.)

Signing off, your servant David, who does this for his own reasons?

Cheapness versus Economic Cyclicality

Posted on 30 January 201631 January 2016 by David Merkel

Photo Credit: Paul Saad || What’s more cyclical than a mine in South Africa?

This is the first of a series of related posts. ?I took a one month break from blogging because of business challenges. ?As this series progresses, I will divulge a little more about that.

When I look at stocks at present, I don’t find a lot that is cheap outside of the stocks of companies that will do well if the global economy starts growing more quickly?in nominal terms. ?As it is, those companies have been taken through the shredder, and trade near their 52-week lows, if not their decade lows.

Unless an industry can be done away with in entire, some of the stocks an economically sensitive industry will survive and even soar on the other side of the economic cycle. ?At least, that was my experience in 2003, but you have to own the companies with balance sheets that are strong enough to survive the through of the cycle. ?(In some cases, you might need to own the debt, and not the common equity.)

The hard question is when the cycle will turn. ?My guess is that government policy will have little to do with the turn, because the various developed countries are doing nothing to clear away the abundance of debt, which lowers the marginal productivity of capital. ?Monetary policy seems to be pursuing a closed loop where little?incremental lending gets to lower quality borrowers, and a lot goes to governments.

But economies are greater than the governments that try to milk them. ?There is a growing middle class around the world, and along with that, a growing need for food, energy, and basic consumer goods. ?That is the long run, absent war, plague, resurgent socialism, etc.

To give an example of how markets can decouple from government policy, consider the corporate bond market, and lending options for consumers. ?The Fed can keep the Fed funds rate low, but aside from the strongest?borrowers, the yields that lesser borrowers?borrow at are high, and reflect the intrinsic risk of loss, not the temporary provision of cheap capital to banks and other strong borrowers.

It’s more difficult to sort through when accumulated organic demand will eventually well up and drive industries that are more economically sensitive. ?Over-indebted governments can not and will not be the driver here. ?(Maybe monetary policy like the 1970s could do it… what a thought.)

So, what to do when the economic outlook for a wide number of industries that look seemingly cheap are poor? ?My answer is buy one of the strongest names in each industry, and then focus the rest of the portfolio on industries with better current prospects that are relatively cheap.

Anyway, this is the first of a few articles on this topic. ?My next one should be on industry valuation and price momentum. ?Fasten your seatbelts and don your peril-sensitive sunglasses. ?It will be an ugly trip.

Redacted Version of the January 2016 FOMC Statement

Posted on 27 January 2016 by David Merkel

Comments

Policy stalls, as their view of the economy catches up with reality.
The changes for the FOMC is that labor indicators are stronger, and GDP weaker.
Equities fall and bonds rise. Commodity prices rise and the dollar falls.? Maybe some expected a bigger move.
The FOMC says that any future change to policy is contingent on almost everything.
The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain?t moving rates up much, absent much higher inflation, or a US Dollar crisis.

Direction Matters More Than Position with Monetary Policy

Posted on 19 December 201520 December 2015 by David Merkel

Photo Credit: International Monetary Fund

As I was reading today, I ran across a quotation from Stanley Fischer, Vice-Chairman of the Federal Reserve. ?It was from an interview on CNBC in April 2015. ?I went to get the original source, and here it is:

Still, Fischer emphasized that a tightening would be slight.

“We have to ask what will go wrong,” he said. “I say that if we get this in proportion, we’re going to be changing monetary policy from the most extremely expansionary we’ve been able to do in all of history, to an extremely expansionary monetary policy.”

Fischer added that the expected increase of a quarter of a percent would be the lowest rates had ever been if not for the recent move to zero.

This is the same mistake that Ben Bernanke made when he talked about the “taper” back in 2013, and the same error that Janet Yellen is making now. At any given point in time, there is a schedule of interest rates going out into the future that reflects the future path of rates that the Fed controls.??This isn’t perfect because?almost none of us can borrow at those rates, but if credit spreads don’t vary much, movements in the schedule of rates, driven by expectations of monetary policy, affect business actions.

This implies two things:

Direction matters more than position in monetary policy. ?If expectations have moved from “zero for a long time” to “over 1% by the end of next year,” that is a large shift in expectations, and should slow business down as a result.
As a result, you can look at the Treasury curve as a proxy for the effectiveness of monetary policy.

On that second point, I have collected the Treasury yield curves since the middle of 2015 on the days after monetary policy announcements. ?Here they are, so far:

Maturity	1MO	3MO	6MO	1	2	3	5	7	10	20	30
6/18/2015	0.00	0.01	0.08	0.26	0.66	1.03	1.65	2.08	2.35	2.86	3.14
7/30/2015	0.05	0.07	0.15	0.36	0.72	1.07	1.62	2.02	2.28	2.66	2.96
9/18/2015	0.00	0.00	0.10	0.35	0.69	0.97	1.45	1.83	2.13	2.58	2.93
10/29/2015	0.02	0.07	0.21	0.33	0.75	1.05	1.53	1.90	2.19	2.60	2.96
12/17/2015	0.18	0.23	0.48	0.69	1.00	1.33	1.73	2.05	2.24	2.57	2.94

You can see the impact of the FOMC tightening out to five years, maybe seven. ?After that, there is no effect, so far, except to say that the yield curve is already flattening, and that the Fed my end up stopping much sooner than many expect — including the FOMC and their “dot plot” which expects a 2%+ Fed funds rate in 2017, and 3%+ in 2018. ?Unless the long end of the yield curve reprices up in yield, there is no way those higher Fed funds rates?will happen.

Which brings me back to Stanley Fischer. ?He’s a smart guy, perhaps the smartest on the Fed Board. ?Maybe he meant there was no way rates could rise much for a long time. ?If that’s the case, he may be way ahead of the curve. ?Only time will tell.

The Graphs Go Southeast

Posted on 18 December 2015 by David Merkel

If you always overestimate, and don't change, what does that imply? — If you always overestimate, and don’t change, what does that imply?

Since the FOMC started providing their estimates on economic aggregates four years ago, I’ve been simplifying them, and posted a weighted average to cut through the clutter of their releases. ?From the above graph, you can see one thing that is consistent: ?They overestimate GDP. ?Far from seeing GDP over 3%, GDP has come in squarely in the 2% range.

It may even be that this is slowly wearing on the participants, who have progressively lowered their initial estimates of future GDP over time. ?You can see that in the initial estimates of GDP 2014-2018, and also the decline in long-term GDP moving from 2.5% to 2.0% in four short years.

The FOMC is no different than the rest of us — they are subject to groupthink and playing catch-up.

You can give them a little more credit on unemployment. ?At least things are going the way they would like. ?That said, improvement in the unemployment rate has exceeded their estimates, while GDP has fallen under their estimates.

They live in a bubble, so please don’t tell them that labor measures don’t correlate so tightly with the economy as a whole. ?I mean, in the long run, the correlation is high and significant, but as far as short-term policy goes, the relationship has a lot of noise, particularly amid globalization and improvements in technology.

Same applies to the PCE inflation rate… they think they can get inflation going (whether truly desirable or not). ?So where is it? ?Federal Reserve, you say you have the vaunted powers to create and destroy inflation. ?If you can do something, do it.

My guess is that the Fed?won’t do it. ?As with most central banks, they have engaged in a game where they increase some aspects of internal credit, and in a way where precious little if any leaks out to the unfavored wretches with no access.

On the short-term bright side, they absorb government debt, which makes it easier for the US Government to keep our taxes low. ?On the dim side, central banks buying lots of government debt has tended to backfire in the past.

Finally, the FOMC participants have overestimated for the last four years the need and willingness to tighten monetary policy.

Can we agree that QE really didn’t do that much, and that the unemployment rate pretty much solved itself, aside from losing a lot workers permanently? ?These graphs behave the way a bunch of “true believers” would think their great power should ?work, and them slowly give in to reality annually, but not permanently.

Anyway, consider these articles post-Fed tightening:

Fed Ends Zero-Rate Era; Signals 4 Quarter-Point Increases in 2016 Bloomberg)

This article is too excited, the math of the FOMC indicates more like 3 quarter-point moves. ?Also note that the FOMC is not very permanent about their views, plans, or whatever.

The Fed and Wall Street Differ on How High Rates Will Go (Bloomberg)

Wall Street, correctly looking at the past says that the Fed has moved slower than they said they would. ?Why should it be any different now?

Fed Raised Rates Without a Hitch, and It Only Took $105 Billion (Bloomberg)

Too triumphalist about the first tightening. ?Wait for the cost of funds to catch up at the banks.

Fed Hikes, but Some Rates Veer Lower (WSJ) Subtitle:?Yields on Treasurys drop after central-bank move

That’s part of what I would tell you to watch — if the yield curve flattens quickly, the FOMC will not do so much, most likely. ?They will still keep going till something blows up.

One final note, and one that I don’t have a link for… Moody’s suggested in a macroeconomic note that yield spreads on junk debt are too high for the FOMC to tighten much. ?Nice thought, though we are in an unusual situation for both Fed funds and junk debt. ?That rule may?not apply.

January 2016	March 2016	Comments
Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year.	Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months.	FOMC more optimistic than the data would support.
Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed.	Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft.	Shades down business fixed investment.
A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources.	A range of recent indicators, including strong job gains, points to additional strengthening of the labor market.	Shades labor employment up.
Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.	Inflation picked up in recent months; however, it continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.	No change.
Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.	Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.	No change.? TIPS are showing higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 1.65%, up 0.12% from January.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.	The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.	No change.
	However, global economic and financial developments continue to pose risks.	New sentence.? They want wiggle room.
Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.	Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.	No change. CPI is at +1.0% now, yoy. Shades inflation down in the short run due to energy prices.
The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.	The Committee continues to monitor inflation developments closely.	No real change, they talked about the global stuff above.
Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.	Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.	No change.
The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.	The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.	No change.? They don?t get that policy direction, not position, is what makes policy accommodative or restrictive.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.	In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.	No change.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.	This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.	No change.? Gives the FOMC flexibility in decision-making, because they really don?t know what matters, and whether they can truly do anything with monetary policy.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.	In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.	No change.? Says that they will go slowly, and react to new data.? Big surprises, those.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.	The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.	Says it will keep reinvesting maturing proceeds of agency debt and MBS, which blunts any tightening.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.	Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.	Not quite unanimous.
	Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.	At last a dissent ? maybe the cost of capital can reach normal levels