The Fed: Behind the Curve or Behind the Eight-Ball?

The Fed uses some pretty meticulous language, spouting words like “transitory” and “intermediate” like they actually mean something. They do, just not in the way they use them.

They believe the inflation rate will hit their 2% target once the effects of low oil prices and the West Coast port strike diminish… what they like to refer to as “transitory,” or short-lived, deflationary pressures.

Hmmm, I wonder if they’d refer to a demographic downturnrn as short-lived, as well?

Then there’s the “intermediate” projections, suggesting a little longer than short-term… but a little shorter than long-term, too.

Between 2018 and 2020, they expect the unemployment rate to hover around 5%; their current target is 5.5%, down from 6.5%.

During that same time, they also expect GDP growth to fall to just above 2.0%, and personal consumption expenditure (PCE) inflation to reach about 2.0% as well.

Apparently “intermediate” actually means about three-to-five years. Who knew?

The Fed’s economic forecast aside, Janet Yellen believes: “Even after the employment and inflation targets are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below the level the Committee views as normal in the longer run.”

In other words, even though the mandates have been met, we can’t raise rates because the economy still stinks.

What’s curious is that 15 of 17 FOMC participants believe the appropriate timing of a rate hike is in 2015. Even more curious is that most of them believe that the federal funds rate will be over 3.0% in 2017.

Talk about killing a catatonic economy!

The expectation now is that the Fed will continue its easy-money policy, that we’ll see minimal economic growth, and that interest rates will not go up anytime soon. In response, stocks soared and bond yields plummeted. No surprise there.

As Rodney said last week, the reality is that the Fed doesn’t really know what it’s doing.

They’re going to react to economic data as it comes in, based on their own sketchy and changing forecasts.

That said, maybe they’ll raise rates, but it will be some time before we see an improvement in economic growth.

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Lance Gaitan