Wednesday, October 11, 2006


I'm a bit of a conspiracy theorist when it comes to the Fed. No, I don't think they create inflation to help out the rich or anything like that (which is a patently stupid idea anyway, inflation helps debtors not savers). What I mean is that I think every word Fed board members speak or write has a purpose, and that each member is loathe to say anything which would not serve the Fed's purposes. Generally I think the purposes are three:

1) Maintain the Fed's credibility as inflation fighters.
2) Communicate the likely path of Fed moves in the coming months, or if genuinely uncertain, communicate what sort of events might cause a cut and what sort of events might cause a hike.
3) Jawbone the bond/forex markets into moving in a direction which supports the Fed's monetary policy goals.

So maybe if you could get Janet Yellen a little drunk and ask her about monetary policy, she might dismiss the idea that core inflation around 2.8% is nothing to worry about, and its safe for us to start cutting rates now to prevent a housing market crash. But when she speaks publicly, she emphasizes that inflation is above the area where the Fed is comfortable, and then back tracks into reasons why the Fed will stay on hold. Read her speech from Monday. That's exactly what she does. Now, I have no idea what Janet Yellen really thinks about the economy. I haven't managed to get her drunk... yet. I don't know to what extent she's tempering her speeches to conform with official Fed views. All I'm saying is that I believe if she did think that a cut was appropriate now, she wouldn't say so.

So if I think Fed members do not really speak their minds in public, doesn't that make reading their speeches a waste of time. Quite the opposite, I say. If you believe that each speaker is trying to honestly communicate the direction the Fed is heading, regardless of the speakers personal opinion, then its as though each speech is really given by the whole Federal Reserve Board and not just one member.

Now, I'm sure the Fed governors who read my blog will object. So Moskow, don't bother e-mailing me. I'm not saying Ben Bernanke goes over each speech before its given. Or even that he gives talking points to board members. Rather I think they have agreed that transparency is best, and communicating vastly different messages would only confuse the market. On the other hand, having different people saying basically the same thing over and over again using different words, would serve to constantly reinforce the Fed's message. It also limits any misinterpretation of the Fed's intentions.

Don't confuse the relative conformity of the speeches with a lack of debate inside the FOMC. I think there is plenty of debate. I've heard a couple Fed staff economists either speaking privately or writing on a blog who have knowledge of how the meetings go down say that there is considerable debate. Both about the actual move and the statement. I believe that. I have to think that any economist who reaches the level of Fed board member has a fair sized ego, and isn't likely to just give in to whomever is chairman at the time.

Anyway, it is in this light that I wait to read the minutes. The trader in me says sentiment is pretty bearish right now, so a rally this afternoon is probably more likely than a selloff, but the fundamentalist in me says rates should be a bit higher, so the sentiment thing is not something I'd trade on anyway.


Anonymous said...

Enjoy the theory, but how does Lacker fit into all of this? Is he simply the blowhard who won't play by Ben's rules, perhaps an outward sulking protest of his new chairman "master"?

Or is it a masterful deception designed to be a "dog whistle" to their fellows "in" on the conspiracy, or perhaps even as a diversion, or as part of a plot to communicate a given uncertainty factor. Ahh, the possibilities!

Accrued Interest said...

Heh... Maybe two months from now, Lacker will mysteriously disappear and no one will be willing to talk about what happened to him.

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