In Fed Chairman Janet Yellen’s speech at Jackson Hole she said the following:
“The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018. 2 The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions.”
It seems Yellen is trying to suggest a consensus of “private and government” forecasts. Does the Fed not trust its own research that it needs to justify a gap wide enough to fit a 747 through? It’s concerning. It’s group think. 70% confidence in statistical terms is effectively zero. Statisticians usually talk of 95% and 99% confidence intervals. 70% is a joke and basing it on a consensus makes it even more ridiculous. If I gave such forecasts as a financial analyst I’d be fired. If the Fed were surgeons you’d never get them to operate on you.
How could anyone possibly think the Fed has the first clue what it is doing? Japan has been going through typhoons recently and the Fed chart must have taken its inspiration from the Japanese Buteau of Meteorology.
The Fed’s number one role is to drive confidence in business and consumer behaviour. The US economy is at stall speed. The last three quarters have nose dived. Business investment is rock bottom. as l’ve mentioned before, businesses invest because they see a cycle, not because rates are low.
Yellen’s went on:
“The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy.”
So again Yellen only proved central banks have colluded in their group think. “Challenges”? “Innovations in communication”? That almost topped the comment from the FOMC minutes in July where it said “monetary and fiscal policy is far better prepared for large positive shocks than negative ones”
Then there was this cry for help:
“As I will argue, one lesson from the crisis is that our pre-crisis toolkit was inadequate to address the range of economic circumstances that we faced. Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy.”
I’d argue the policy tool kit is more inadequate now than in 2008. Moreover even the Fed thinks it might be too optimistic
“Of course, this analysis could be too optimistic. For one, the FRB/US simulations may overstate the effectiveness of forward guidance and asset purchases…Finally, the simulation analysis certainly overstates the FOMC’s current ability to respond to a recession, given that there is little scope to cut the federal funds rate at the moment”
In closing perhaps we should be worried that the group thinking central banks are likely to depend on each other for more clueless guidance such as broadening the types of toxic waste it can shove on its balance sheet:
“On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets.”
We should be gravely concerned when we read between the lines. Zero confidence and it is being more widely understood by the day.