Forward Guidance - When in Doubt, Expect a Cautious Fed

President Trump mused that it would be "crazy" for the Fed to raise rates in December, but his comments miss the point on how the Fed is operating. The continued themes through Fed forward guidance are caution and flexibility. Investors are looking for certainty about the policy path, but the Fed is only going to give fuzzy guidance. Policy will be adjusted slowly so as to not make a mistake. There will be no rules that will bind behavior. When in doubt, do not change from the status quo. We are still living a Yellen Fed world.

This was clearly stated a year ago at one of former Fed Chairman Yellen's speech at an ECB conference.

“In my experience, market participants are very interested in knowing what the path of policy will be and when changes will be made either in asset purchases or in the policy path. And that’s something that central banks are loath to provide."

 “Obviously there’s inherent uncertainty about the outlook for the economy and so the committee’s expectations for appropriate policy evolve in time and in line with the outlook. When that happens my experience is that market participants often feel they have been misled,” 

Names and faces may change, but the behavior of the Fed usually does not. If you are expecting something to change with a new Fed Chairman, you will be disappointed. See Chairman Powell's comments at the Jackson Hole conference. He is comfortable with a cautious Fed based on the old Brainard principle that when uncertain about the effects of policy move more conservatively.

"In retrospect, it may seem odd that it took great fortitude to defend “let’s wait one more meeting,” given that inflation was low and falling. Conventional wisdom at the time, however, still urged policymakers to respond preemptively to inflation risk even when that risk was gleaned mainly from hazy, real-time assessments of the stars."

However what is different is that some of the underlying guideposts such as r-star have been deemphasized.   Do not expect any short-term reaction to changes in macro data. Do not expect a reaction to the recent volatility in equity and fixed income markets. While there may be more focus on what the Fed might do, investors should work under a prior of no change from current policy. When in doubt, fade Fed action especially if the markets respond to data still in a broad range of tolerance.

Fuzzy criteria on what data will drive policy given it may be noisy, fuzzy models on what is the neutral rate of interest, and a fuzzy reaction function that does not bind the Fed to inflation, growth, or asset market behavior is still the order of the day.