A key monetary policy story for the year is the complete failure of forward guidance using the SEP (Summary of Economic Projections). The Fed has no special insights and using their forecasts can be dangerous to your economic health.
At the end of last year, the 2019 forecasts were for higher rates and short rates rising above 3 percent in 2020. The new forecasts are 150 bps lower for 2020 and now have no changes in 2020. No wonder stocks are higher and bonds did well for year. It was a complete reversal of estimates for 2020.
The CPI is now at 2% and there is a lower probability of a recession. There is no special Fed skill at providing guidance to Wall Street or businesses. These projections provide insight to their thinking at a given time but do not represent quality forecasts.
Will the Fed funds stay the same for 2020? The Fed funds futures is showing at least one cut in 2020. The target rate probabilities suggest a 20% chance of more than one cut. The fact that the SEP is the same as current rates tells us that Fed median guess is now saying that the best estimate for tomorrow is the rate we see today. The Fed rule should be simple, follow what they are doing not what they are forecasting.
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