Submitted by Jeffrey Snider – Alhambra Investment Partners
When something deviates so far from expectations, the last thing you would do is dismiss it as unimportant. Yet, that is exactly what has happened in 2015 among the cabal of economists that claim to be able to control monetary levers of economic interjection. It’s not just that the FOMC will not act as it was so sure it would, the real comparison is how far the committee members themselves expected they would have by now. That more relevant scale for comparison shows you just how serious the economic deviation has been this year.
Below are the infamous “dots” published from March 2014 when Janet Yellen was confidently claiming “six months” – meaning that she expected to end ZIRP six months after the end of QE. The rise in the Establishment Survey that summer propelled several mainstream economists (and clearly some of the FOMC were already thinking this) to begin forecasting a rate hike as early as March if not January 2015. Their interpretation of the economy was so robust that their sense of danger was seriously overheating not falling toward recession. From that we can infer, quite reasonably, they have little appreciation for the actual economy.
Two members in December 2013 were expecting the federal funds rate by the end of 2015 to be 2.75% or more. By March, more than half the members (10) were expecting 1% or higher for this year, including three at 2% or higher. All but two predicted at least one rate hike. In short, overheating never was, which, again, as a major nonconformity marks a truly a serious problem. Everything that has happened with regard to monetary policy has been to explain how this could happen while simultaneously trying to claim nothing has happened.