EC A Look Inside The Minds Of The FOMC

Picture Credit: TZA

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 is 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.