Wednesday, June 15, 2016

Fed dot plot - not forward guidance but misguidance

"When the facts change, I change my mind. What do you do, sir?" - Wrongly attributed to Keynes but some have said it sounds like him.

This quote is the best we can say about why the Fed's dot-plot change so often. The dot-plot is what the Fed is thinking at the time the plot was generated, but their usefulness as a guide for what the Fed plans or expects to do in the future can change radically in a matter of just three months. We cannot forget that these are not the musing of private economists but of the policy-makers who may vote on the level of rates. The dots represent their views of where rate should or could be over the next few years.

The 2018 forecast has fallen by 75 bps. The 2016 median forecast may be the same, but the mass of the distribution has fallen considerably. With inflation expectations lower, unemployment below 5%, growth about what is expected relative to March, the driver for change was the bad non-farm payroll report. One report and the plot curve has shifted down.

There is no long-term guidance with these numbers. They change with fluctuations within a quarter. Is that the intent of forward guidance? I cannot belief that this is the Fed's intent.  If anyone questions the quality of this guidance, they will be referred to the Keynes quote. A good non-answer on guidance. This plot volatility impacts the Fed's creditability both in the short and long-run. 

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