A Fearful Game Of Connect The Dots

The Fed has been throwing off mixed signals for years; yesterday’s FOMC statement was just the latest.

The Federal Reserve issued its Federal Open Market Committee statement on Wednesday. That statement and Fed chair Janet Yellen’s press conference revealed something interesting: The Fear Trade lives.

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From the beginning of January until the middle of February, the markets traded on fear. Fear of oil, fear of China, fear of negative rates, fear of recession. Although stocks have recovered and the markets have calmed, those fears have not disappeared and remain just below the surface.

And now we know the fear trade took a toll on the Fed. Instead of statement language that exhibited growing confidence in the United States, we got less. The Fed said the economy was okay but left in the full language regarding the possible threat from global markets and economic conditions. Yellen said little about inflation turning higher. In fact, she was almost dismissive when asked about the recent upturn in inflation.

The smoking gun that revealed the Fed’s fear was the dot game. Every quarter, each Fed official puts dots on a timeline of when they think a rate increases will likely occur. The dot game in December showed Fed officials were looking for four rate increases in 2016. In this latest dot game, the Fed cut the rate increases to two and lowered the outlook for 2017.

Let’s review. Since December, payrolls have averaged significantly more than 200,000 and all inflation indicators have turned higher. Yet, the Fed not only did NOT tighten, it saw fit to peel back the rate forecast significantly.

The only explanation is fear.

Why the concern? Does the Fed know something? Did Yellen learn something at the last G-20 meeting that scared her? Did the Fed merely fall victim to the negative psychology that persists? Most likely it’s the last possibility, but we will not know that for some time to come.

One thing is for sure, Janet Yellen didn’t divulge anything yesterday. Even if I haven’t always agreed with her conclusions, I think Yellen has always done a good job in press conferences. Her answers to reporters’ questions have always been cogent, direct, and understandable. Yesterday she was all over the lot, dodged questions, gave convoluted answers that did not answer the questions at all, and was a bit curt a few times.

Maybe she was just off her game. Or, perhaps she is reflecting a Fed that is fearful and uncertain about doing the right thing.

In my opinion, the Fed is making mistakes in monetary policy. Yesterday’s decision was just the latest. The Fed has been throwing off mixed signals for years. It moves the goalposts on data and flip-flops between meetings. Maybe it’s not time to fear the global markets; maybe it’s time to fear the Fed.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

March 17, 2016

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