In today’s world, it’s not hard to find countless plans promising success. From diet tips like “eat celery sticks and lose weight” to financial advice such as “stocks for the long run,” the market is saturated with strategies. However, the reality is that genuinely effective plans are exceedingly rare.
This was palpably evident this week on Capitol Hill during the biannual monetary policy session. Amid all the excitement, there was a conspicuous absence of viable strategies. Surprisingly, there weren’t even any obvious poor plans to critique.
After Fed Chair Janet Yellen’s testimony concluded, Congress found themselves more in the dark about the Fed’s intentions than they had been prior. For example, when queried about a potential rate increase next month, Yellen responded, “I can’t tell you exactly which meeting it would be. I would say every meeting is live.”
But what does this actually signify? Should we interpret it to mean that a rate hike is a likely possibility? Or perhaps she meant it could happen someday? The uncertainty lingers.
Weak Strategies
In truth, Fed Chair Yellen does have a plan. Unfortunately, it’s not a sound one but rather a flawed approach. Her strategy essentially revolves around reacting to economic data, waiting for indicators to reveal whether the economy is strengthening or weakening before she takes action.
She considers numerous factors such as GDP growth, unemployment rates, and inflation metrics to gauge the economic climate, which she then weighs against her established beliefs about the economy’s ideal state.
Yellen faces the challenge of answering questions regarding apparent deficiencies in aggregate demand and perceived excess in supply. For instance, this week, the Bureau of Labor Statistics reported a 0.6 percent spike in consumer prices as measured by the consumer price index, the largest increase in nearly four years, with an overall 2.5 percent rise over the past year.
Given that a 2.5 percent inflation rate exceeds the Fed’s target of 2 percent, one would expect them to take action to stabilize inflation. However, there are many complexities they must navigate and other considerations in play.
First, they must analyze a multitude of data. Next, they may rely on vague intuitive measures. Following that, the FOMC composes the Fed’s dot plot, a representation of their projections. Finally, the Fed deliberates on whether to raise, lower, or maintain the current interest rates.
The Art and Pseudoscience of Monetary Policy
Can you grasp the essence of it all? This, in a nutshell, captures the essence of how central planning by the Fed unfolds in 2017. Simply put, it resembles a nonsensical exercise. But there’s more. Along with this inherent absurdity, there’s a critical flaw that cannot be overlooked.
The data points employed to shape monetary policy are often unreliable. Metrics such as unemployment, Gross Domestic Product, and inflation statistics can be manipulated and adjusted by government analysts to fit particular narratives.
Accompanying every headline figure is a list of nuances and adjustments, including hedonic price alterations, seasonal adjustments, and the mysterious disappearance of discouraged workers. These subjective modifications significantly influence results.
So how does this process unfold?
Data is extracted and manipulated into various metrics. Calculations yield percentages, expected rates of change, and colorful visual representations.
Then, planners proceed to determine the price of money in a way that shapes the economy to their preferred outcome. Their goal is to enhance the appearance of data and the accompanying charts—a curious mix of art and pseudoscience.
The most intriguing aspect of this entire scenario resides in the core of this grand illusion, where Fed Chair Yellen spins alongside data interpretations while presenting herself as a benevolent figure. Round and round she goes, and when she stops, no one can say.
Sincerely,
MN Gordon
for Economic Prism
Return from The Art and Pseudoscience of Monetary Policy to Economic Prism
