Lose the guidance, really

I see on Bloomberg this morning that Steve Ricchiuto of Mizuho has  a pretty palatable (to me) view of the Fed.  There is no urgency for them to raise rates. The recent past has again been one of disappointment on the demand side, and the medium-term prospect is not boomy.

Ok, fine. But he channels are very misleading consensus view of what the Fed is up to here. And in his case it is jarring because it is actually against his main call, of the Fed being on hold.

He starts with the false premise that the Fed wants to raise interest rates but that it is not clear that the data will allow them to do so.  That is wrong because the Fed — at least its leadership, I hope — has no desire either way on what to do with interest rates.  What they want is to manage the economy properly. If that means raising rates, then they will do so. And if it does not mean raising interest rates, then they will not do so.

The idea that the Fed will raise rates unless given a clear reason not to has been a huge loser for years now, and yet people still cling to it, even people whose ultimate call is dovish. That is pretty weird.

I blame the Fed itself.

They continue to publish interest rate forecasts, even though the case for doing so departed long ago, roughly with the approach of near full employment.  Long story, described here.

When the Fed projects that they will raise rates by a certain date or by a certain number of times in a given year, hat creates a source of cognitive dissonance in the event the data disappoint, as they have tended to.

The way the Fed has dealt with this cognitive dissonance has left the impression that the Fed “wants to raise rates”, when in fact what they want is a) for the economy to perform decently (as mentioned) and b) NOT TO BE EMBARRASSED.

If they got rid of the guidance, even in the form of dots, which Yellen right disses whenever she can, then this issue would partly go away.

One final point on this issue.  The Fed leadership probably would like an economy that allows higher rates. And their failure to be clear about the actual target is — or occasionally to wander into pointless discussions of bubbles — probably adds to the confusion. But at the end of the day, their objective is the economy.

I find it weird that this even bears mentioning. It opposes one of those many untested premises or unknown unknowns that seem to follow Fed watching around.