Fed Thoughts: Existential Angst

A remarkable amount of effort at the nation’s central bank is devoted to justify doing nothing. As evidenced by the 16 footnotes and 12 references of Chairwoman Yellen’s most recent speech, there is a lot of science involved, with data smoothed, models run, and inferences offered.1 As tracked by researchers at the Federal Reserve Bank of St. Louis, a reader of the statements of the Federal Open Market Committee (FOMC) needs a post-undergraduate education to grasp the meaning.2

Still, more than economics is needed to understand current policy setting. Based on their behavior, the nineteen participants in the FOMC process no doubt took their share of French literature and film classes. After all, they are delivering monetary policy firming with the trepidation and sense of external dread as Yves Montand delivering nitroglycerin across a mountain ridge in the 1953 classic, “The Wages of Fear.” For those who left art-house cinemas behind, in the film an evil American oil company needs to get explosives to a field in a remote part of South America to blow out a well fire. Not wanting to risk their relationship with their unionized workers, they recruit four outcasts to transport the volatile material along a rudimentary road. Spoiler alert: Explosions ensue.

Over the past nine months, many private-sector forecasts of policy rates have similarly blown up as official assurances that firming was in the cards tapped out. Also similarly to the film, the experience has raised existential angst among investors as the random blows of fate accumulated. A scare in China evens GDP growth tracked above 6%? A referendum looming in a country making up 6-3/4% of global GDP? Disappointment about a component of the employment report that has a 90% confidence interval of 230,000 workers? These were enough to stop the FOMC truck in its tracks along the gradual incline of its rate guidance.

Understanding why Janet Yellen grips the steering wheel so tightly is part about economics and part about policy committee dynamics.

1 http://www.federalreserve.gov/newsevents/speech/yellen20160606a.htm.
2 The research is available here https://reserch.stlouisfed.org/publications/es/14/ES_23_2014-11-05.pdf.

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