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  • Fed Policy Confusion

Economy

03 May 2006

Fed Policy Confusion

  • By Bill Conerly
  • In Economy

News reports say that the Fed is not getting its message across clearly.  Certainly markets are jumping back and forth as their interpretation of the Fed’s message changes.  But it’s not that hard.  The Fed’s message is not getting across because a bunch of idiots aren’t listening.

Misconception:  The Fed has a complete plan for the future that they have decided to keep secret.

Truth:  They are making this up as they go along.  There is never a need for them to carve in granite their future moves.  The sensible thing to do–which is exactly what they do–is to watch the data as they emerge, test their forecasts against new data, and make their decision on a case by case basis.  When fed funds rate was very low, they figured that they’d need to raise it by at least three percentage points, but every step was made in light of current conditions.  For instance, when they took the fifth rate hike, they were not on autopilot, blindly implementing their previously-developed plans.

Here’s what to expect: at each FOMC meeting, the Fed will review the data and their forecasts, plus forecasts from outside bodies, and come to a decision.  At this point, the Fed Funds rate is in the neighborhood of neutral, neither stimulative nor contractionary.  There is no grand plan beyond keeping inflation low, and the economy moving forward (in that order).

Business strategy implication:  Possibility of a couple of more rate hikes this year, but no major move (like more than a percentage point) is needed.

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