Yellen's Dashboard

"The only function of economic forecasting is to make astrology look respectable." - John Kenneth Galbraith

I do not envy Janet Yellen, but I have to say that I am warming to her as the Federal Reserve Chair.  Last week the FOMC had its meeting and the results are a slight testimony to the Federal Reserve in that she pretty much admitted that the data presented was too unclear to formulate a decisive direction for the main Federal Reserve's policies.  Finally someone has come forward and admitted that they really have no clue where the economy is going and that they will have to wait to see what happens next before proposing a solution.  This is refreshing in that she is owning up to what we already knew, the Federal Reserve is reactionary rather than being preemptive.  For all of those who believed that the Federal Reserve had a "special" set of metrics that it could use to steer the economy on an even keel, this bubble has finally been burst.  There never has been a magic number and there is no magic formula, they are just as constrained and confused as everyone else, the only difference is that they have massive sway over the markets and have used it to manipulate it for the supposed benefit of all.

Looking at their forecasts shows this first hand.  While unemployment is expected to fall to 5.3% over the long run, inflation is expected to continue below the Federal Reserve target of 2%  and GDP is expected to remain around 2.5%.  I find these numbers very interesting as with anemic economic growth it will be increasingly hard to reduce unemployment much further than the current level so either the unemployment number is overly aggressive or GDP and inflation are too low.  In response to this line of questioning Yellen responded that incoming data could prove stronger than expected and potentially invite rate hikes that occur sooner and more rapidly than now envisioned but she also added that incoming data could go the other way too, and lead to rates staying lower for longer than now envisioned.  So in other words she is on the fence and other than continuing to reduce the monthly buy of Treasuries to zero by October the Federal Reserve is in a wait and see mode.

In order to track movements in the economy she has opened up that her dashboard of indicators is far larger than her predecessors.  In other words the more data the better.  The problem with all that data is that there is also a lot of noise infiltrating the decision making process but at least she is not confining herself to a short list of metrics that really have no baring on the economy.  Using the underemployment rate, changes in consumer spending and the job quits rate are all better metrics than the unemployment rate.  So while these are giving her a better indication of the labor market it could mean that the Federal Reserve remains in limbo for an extended period while they wait for an uptick across the dashboard during which time inflation could be rearing its head in metrics other than the Core PCE, her preferred metric. 

The result could be that the Federal Reserve keeps interest rates low for an extended period (through 2016) only to be forced into trying to extinguish an accelerating inflationary fire after it has already burned half of the country.  Once again acting in a reactionary way to data that the rest of us are witnessing first hand right now.  At least she is more honest than her predecessors in saying that she has no ability to guess the future but outside of that know that you need to protect yourself rather than rely on the Federal Reserve.