Fellow blogger Marcus Nunes has a post about the Fed minutes in which he declares the minutes to be:
Expansion of economic activity is expected to be slower but RGDP was still expected to rise faster than potential in 2015-16!
Resource slack is expected to diminish slowly. This seems inconsistent with RGDP expected to rise faster than potential!
They say 2% inflation is years away!
And they think monetary policy is supportive!
Marcus, you’re right over the target!
Before I get to my expansion on the just how pathetic I view the minutes to be, I’d like to share with you an anecdote. In a Fortune 500 global enterprise in which I am an Active Directory Engineer, when domain controllers, the servers responsible for authentication, have problems it’s highly visible because almost nothing works. The email system, e-business, and most internal applications all grind to a screeching halt. Fortunately, we’ve had only two instances of problems like that since I’ve been there. But to say the least, problems like that get a lot of attention, especially when it comes to meting out blame. So my engineering group has to start at the bottom and work out way up, going through each domain controller involved in an outage to find any problems that may be related, documenting any issues to be found and trying to piece together a likely scenario.
Suppose, though, that when an engineer goes to look for a technical problem she finds absolutely no evidence. I mean, surely if a domain controller was taken down I’d see something out of the ordinary. But there is zero evidence. What sort of conclusion could be drawn?
My first time going through that, I turned over every rock, followed every lead straight into a dead end. After hours of searching for an answer, every log entry became suspect – and each log has hundreds of thousands of lines. I beat myself up for not having the answer that I was sure was staring me right in the face, one that I just couldn’t see.
What I discovered from that experience was that the most obvious answer is almost always the best one – that there was nothing wrong with the domain controller at all. A malfunctioning application server had simply bogged it down to the point where it was extremely slow and moved on to the next domain controller after the first had become unresponsive; and forensics after the fact was completely useless.
The point here is that situations can be overanalyzed to the point of becoming near meaningless, and upping the magnification on the microscope or looking at yet more data doesn’t provide any more helpful information. But yet, we see the same kind of anxiety ridden uncertainty around the recent collapse in the TIPS spreads in the Fed minutes.
Survey-based measures of inflation expectations remained well anchored, but market-based measures of inflation compensation over the next five years as well as over the five-year period beginning five years ahead had declined over the intermeeting period. Various explanations were offered for the decline in the market-based measures, and participants expressed different views about how to interpret these recent movements. The explanations included a decline in inflation risk premiums, possibly reflecting a lower perceived probability of higher inflation outcomes; and special factors, including liquidity risk premiums, that might be influencing the pricing of Treasury Inflation-Protected Securities and inflation derivatives.
So now they don’t really know what the decline in TIPS spreads means. If the most obvious answer is the correct one, it means the same thing it’s always meant – declining inflation expectations. Harkening back to the fateful days of the FOMC meeting in September 2008, I can see that these FOMC members have learned nothing about seeing what they want to see instead of what is really there.
Earlier in the statement, the possibility of importing deflationary pressure from the rest of the world is analyzed and a rather astonishing conclusion is reached:
In discussing economic developments abroad, participants pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar over the period. It was observed that if foreign economic or financial conditions deteriorated further, U.S. economic growth over the medium term might be slower than currently expected. However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited. These participants suggested variously that the share of external trade in the U.S. economy is relatively small, that the effects of changes in the value of the dollar on net exports are modest, that shifts in the structure of U.S. trade and production over time may have reduced the effects on U.S. trade of developments like those seen of late, or that the slowdown in external demand would likely prove to be less severe than initially feared. Several participants judged that the decline in the prices of energy and other commodities as well as lower long-term interest rates would likely provide an offset to the higher dollar and weaker foreign growth, or that the domestic recovery remained on a firm footing.
Bad news out of Europe travels so fast that it hits our markets in an instant. In the beginning of the statement, the stock market volatility that took Bullard to recant his hawkish rant to quell is blamed on Europe. Europe being to blame is probably more correct than not. But the point about it not meaning much is probably more Pollyanna-thinking than anything based on reality in a globalized economy. The company I work for is heavily invested in Europe, and it is more the rule than the exception. And, of course during that period of volatility is when the TIPS spreads experienced the lion’s share of decline. Man, do they really need a ton of bricks of fall on their heads to ‘get’ the obvious risk of importing deflation – or that it IS already happening? Apparently so.
But they turn that idea completely on its head and claim that falling oil prices and strengthening dollar will make imports less expensive – enough to off set the imported deflation. Oh, man. I just couldn’t make this stuff up. See, it’s the manna from the Fed- making everyone richer without working for it. (see my summary listing of inflation targeting deceptions).
And here’s some more canned astonishment from the Fed’s staff economists regarding foreign effects on the US outlook:
The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth and inflation were seen as tilted to the downside, reflecting recent financial developments and concerns about the foreign economic outlook, as well as the staff’s assessment that neither monetary policy nor fiscal policy appeared well positioned to help the economy withstand adverse shocks. At the same time, the staff continued to view the risks around its outlook for the unemployment rate as roughly balanced.
The risks to the outlook, two out of three elements for which the Fed is responsible for, are tilted toward the down side. Neither monetary policy nor fiscal policy are well position to deal with downside risks. So they do what about the part of the problem they can do something about? They shrug it off as roughly balanced. Nothing more to see here folks, move along.
Fortunately, not all of it is completely pathetic. One member appears to be at least somewhat rational:
One participant noted that even if the declines reflected lower inflation risk premiums and not a reduction in expected inflation, policymakers might still want to take them into account because such a change could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity.
But the devil is always in the ‘however’:
A couple of participants noted that it was likely too early to draw conclusions regarding these developments, especially in light of the recent market volatility. However, many participants observed that the Committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations; some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.
And what, exactly would they do about this worrisome situation? It doesn’t say – leaving the impression that they’ll cross that bridge when they can verify that we’ve indeed crossed it. By then, it will be too late. And of course markets are irrational – and they just can’t be sure of anything with all that volatility… What exactly do they think the starting of a recession looks like?
I say forget normalizing policy. I demand reform of this miserable (and pathetic) way of conducting policy by conjecture and pinch of pixie dust. I vote NGDPLT!