We have offered several recent specials in anticipation of the new Fed policy announced Jan/25. We recommend that serious market observers review especially the sketches of Jan/5 and Jan/7 and that of Jan/26 to be found on the Hades site http://www.hadesresearch.com/.
We commend Bernanke’s journey to a world of transparency but since the Fed’s understanding of market dynamics is mediocre at best, the trip is freighted with risk. Fed policy makers are economists. Economists are trained to analyze. Most cannot forecast.
Greenspan, one of the worst forecasters ever, understood policy making was seat-of-the-pants and did his best to hide that fact. By his policy of openness Bernanke has made himself vulnerable. We commend him for his courage, a commodity in short supply with Greenspan. Still, for Bernanke it will be a painful journey.
For example, 14 of the 17 policy makers expect FF’s to be unchanged at the end of the year and 11 at the end of 2013. This borders on the absurd. But since this is from the market’s money god, it becomes reality; more, a certainty for most observers. Yet we know that the US real sector will deliver more than most expect, H1. So we will have intended Fed generosity in the face of surprising vigor, which can only mean a steeper term structure. Policy makers will change course but not in time so this is exactly the impact we can expect. We are not interested in arguing with these people; we only want to convert their intent to the bottom line.
One individual who agrees with us is the Phily Fed's Pres Charley Plosser. "Such statements are, in my mind, particularly problematic from a communications perspective," Plosser noted today. "Monetary policy should be contingent on the economic environment and not on the calendar."
Exactly so my friend.
Robert Craven
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