FOMC Update: Professional Politics

Sadly, in what is becoming a proactively predictable statement of conflicted US Federal Reserve monetary policy, Ben Bernanke opted to pander to the easy money policy that has amplified both the volatility of markets and the cyclicality of price inflation/deflation since he took his lead from Alan Greenspan.

 

Our advice this morning was to respect the cost of capital. Promising a risk free rate of return of ZERO percent to both domestic and foreign investors will not inspire investment. We live in an interconnected world where capital seeks yield. Ask the Brazilians and Chinese what they think about that…

 

Whatever you do, don’t ask Ben Bernanke and his troubadour of the willfully blind at the Federal Reserve for an economic forecast. If he didn’t see economic growth and inflation in the last 12 months he’s definitely not going to see it now. Like a broken clock, he’ll eventually get it right – the double dip we are forecasting for both the US economy and US housing will be here come Q4. By then, Bernanke will be formally cutting his economic forecasts.

 

As a reminder, Bernanke’s forecasts on US economic growth are about as far out in the stratosphere of nod as we have seen in some time. That said, given his outlook, he should have the Fed Funds Rate at least 100 basis points higher than where it stands today (he is looking for upwards of 4% GDP growth in the US in 2011). So it’s time he either raises rates in line with his forecast or just takes a chainsaw to his forecasts.

 

Wait – he can’t cut his forecasts because lowering the GDP estimate will make the US deficit/GDP calculation look worse than Greece’s come 2011. Better hope for another “great depression” that “no one could see coming”, then cut forecasts after the fact I guess…

 

In today’s statement he went as far as to say that the “labor market is improving gradually.” I couldn’t make that up if I tried. If he’s forecasting these kind of economic growth numbers, I guess he needs to provide a narrative to support the forecasts – this is called confirmation bias (bad).

 

Looking at the latest monthly US unemployment report and round of May housing numbers, Mr. Macro Market has already provided the only economic forecast that should matter to Americans. As any good risk manager who has managed real capital in his or her life would say, it’s on the tape.

 

Maybe he’s not serious about forecasting. Maybe he just is who he is – a good natured academic trying his best to be a professional politician.

KM

 

FOMC Update: Professional Politics - 1


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