The Fed again brings out its crystal ball

The FOMC tomorrow will tell us at what level they want to price fix the short term cost of money and for how long. This forecast from each individual member will be based on their economic forecasts. While these forecasts will be useful from a market perspective as the Fed’s words alone can influence rates, relying on Fed forecasts as something close to ultimately being accurate has historically proven to be dangerous. For a quick instant replay check over the past 10 years, the Fed believed the US economy was on the cusp of deflation in ’02 thru ’04 and it’s why they lowered the fed funds rate to 1% and kept them there for a full year. This forecast of deflation of course was wrong as one of the great commodity bull markets of all time began in early 1999. We also know this cheap money below the rate of inflation enabled the credit bubble. The other Fed forecast of major consequence was said by Ben Bernanke to Congress on March 28th 2007, “At this juncture…the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” My point is that the extra transparency the Fed will give us today is irrelevant if they get the underlying policy wrong and the chances are they will. It is why the marketplace and the countless number of participants should be setting the cost of money, not trained economists doing so based on their econometric models.

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