You wouldn't know it from CNBC, which says the Fed has been doing a "terrible job," or many other financial media sources, politicians and pundits: the US Federal Reserve Bank perhaps has been more keyed-in to the state of the American economy, and what it needs to continue to grow, than any of those who have been confidently predicting an imminent collapse of the stock market or a return to recession--or worrying that maybe we already are in a recession!
Beginning at the start of 2016, financial markets had plunged on the fear that the Federal Reserve's December 2015 decision to begin the process of normalizing US rates with a .25 percent increase--coupled with a projection of four such increases in 2016--was out of step with considerable weakening of economic conditions outside the US. Other major central banks, including Japan, the Eurozone and China, had been embarking since August on further monetary easing policies (even negative interest rates) to combat persistent risks of deflation and economic decline, in an effort to depreciate their currencies and stimulate local growth. Consequently, the US dollar was continuing to increase in relative value, to the detriment of US multinationals and exporters, as earnings dipped and the risk of layoffs beyond the energy industry increased. Some even felt the new Fed policy was itself heightening the risk of a return to recession in the US--even concluding the Fed's policy itself had become "the root of the problem."
The truth, however, was far more complex than that. Firstly: market commentators who had fiercely criticized the Fed in September for taking global economic developments into account in deferring an interest rate increase at that time (the so-called illegitimate "third mandate" accusation, beyond the Fed's statutory mission to work for stable prices and full employment in the US) were now saying in early 2016 that the Fed should be paying more attention to what was happening in China, Japan and Europe! While we know that bond traders always seem to think the Fed is always wrong, no matter which direction it takes monetary policy (see CNBC's bond-trader spokesperson Rick Santelli), such obvious attacks on the Fed were clearly misplaced. Most obviously, overseas economic reactions, if dramatic enough, always have the potential to affect US prices and hiring!
But leaving aside mere inconsistency of the Fed's constant critics, there was also an element of willful self-delusion (or even an effort to delude retail investors) in the markets and the media about what the Fed actually said and did in December. This phenomenon revolved mostly around the so-called "dot plots" the Fed releases quarterly to indicate the median view of future interest rates of all those senior Fed officials who participate in the Open Market Committee meetings that set interest rate policy. An example of this self-delusion can be seen in The New York Times report on the Fed's recent decision, where it stated that the "Fed entered the year planning to raise its benchmark rate about one percentage point, most likely in four quarter-point increments" (my emphasis).
But the truth of the matter is that the Fed had no such "plans." As Yellen herself said in the Q & A session with reporters after the meeting, the dot plots are just the best estimates of individual Fed officials and "not a preset plan, or commitment, or promise.
Yellen was responding to a question from CNBC's distinguished economics reporter about whether the Fed was losing "credibility" because it was stepping away from the message of its dot plots in December. But Liesman, of all people, should know better than to reach this erroneous conclusion. Firstly, Fed officials had been publicly backing away from the dot plots since the markets began their precipitous fall in January (see New York Times article, above). More importantly, Liesman's question reflects the common market delusion that the dot plots could ever be perceived as a fair predictor of Fed policy actions precisely because, as Liesman surely knows but seems like his network, never to have disclosed to his listeners, fully 40 percent of the "dots" represent the views of Fed officials who do not have a vote on Fed interest rate decisions this year!
Indeed, the non-voters are largely regional Federal Reserve Bank presidents from around the country who are not currently "on rotation" as rate-setting voters, and they tend to have a hawkish bent in terms of favoring a quicker pace of rate increases than the voting consensus. Thus, the only way to push their case is to purposely tilt the dot plots in their direction, to perhaps entrap the Fed into a faster pace of increases than the voters want lest the Fed lose "credibility."
Liesman (perhaps unwittingly) played his part in this possible scheme to perfection, but Yellen cut him off at the knees with a dose of plain English reality, not to mention dot math! CNBC was left with commentators frothing that the Fed showed some nerve in not raising the benchmark rate right now--despite being a leading force promoting the line that a recession was lurking right around the corner (which, if true, would mean a rate increase would have been a very bad decision, but never mind).
Why CNBC, Liesman and other financial news outlets and commentators have kept the facts about the dot plot distortion very quiet recently bears inquiry. Certainly, such selective reporting helped the case of short hedge fund managers who profited from the market's collapse in January and February. It fostered the story that the Fed was hell-bent on raising rates despite the evidence of a slowing global economy hurting the US GDP (which barely got close to percent growth in Q4 2015). CNBC added weight to this argument with its persistent featuring of market commentators and pundits who perceived that recession might already be here (see above), or is simply inevitable with the market message to sell all (as a J.P. Morgan strategist put it--quoted by CNBC!)
Notably, the market hit its near term low in mid-February, and some smart market players made a lot of prescient buys before the latest Fed meeting decision at the lower prices the short players had triggered. Surely, some of them had read the "fine print" of the fed dots better than experts like Liesman. (Maybe some of them even were short sellers in January!)
The Fed chair has been unmistakably clear for quite a while that the voting Fed is, above all, data-dependent, and is moving to normalize most cautiously ("Caution is appropriate") while attempting to discern the sometime mixed messages coming from both the global and US economies. Caution in terms of normalizing has served the Fed and the US economy well for several years, in keeping both employment growth and GDP on a steady if unspectacular rising course. And now most observers believe that unemployment will stay below 5 percent, and that GDP will average 2 percent or better, for 2016.
Investors, take the deal! And pay more attention to the market--which seemed to disbelief the tale of the dot plots from the start--than the market experts, especially those biased to assume the Fed is always wrong!