Here is a Bloomberg story covering Mohamed El-Erian’s view that the Fed will have to tighten to ward off a bubble and that investors are not prepared for that. I think that view is ridiculous, which I will get to in a second.
First, though, forecasting the economy, Fed and market is really hard. If you try to do it, then you will almost certainly embarrass yourself, repeatedly if you keep at it.
But have you ever noticed that guys getting their Fed and market calls/guesses right have NEVER been heard to say, well I think the Fed needs to tighten here to stop an incipient equity bubble?
No, that view is invariably expressed by people who have been too hawkish on the Fed and too bearish on the market, often because they got inflation wrong to boot.
We all make mistakes and the temptation to cover them up is strong. But asserting the Fed will add a variable to bail you out is so transparent. If you see somebody making that claim, there is no need to look. You can know ahead of time that they have been wrong, at least recently.
The Fed’s preferred way of thinking about inflation is not working, not that Fed officials were ever so confident in the Phillips Curve as they pretended. And in response to this, the Fed finds itself in the awkward position of having to “probe” lower on unemployment / tighter in labor markets to see where / if they might get an inflation response.
This is quite dodgy for them because it involves admitting that they (like me) don’t really know what is going on and taking the risk of letting the labor market shoot beyond full employment. I would not want to be them just now.
But it seems ridiculous to assert that they will want to complicate the task even further, by adding yet another objective to their list, one over which they have little control. And yet you see that assertion all the time. Practically speaking, its main value is to signal that the asserter has recently been wrong-footed by the Fed.
I ask myself, why does this bug me so much? Ahhh, probably just jealousy that El-Erian and his ilk hog all the attention. It’s not like these wrong views are going to have any influence. The issues with the Fed and equities are elsewhere. So far as I can tell, people making actual decisions get that.