In response to the FT Blog of Gavyn Davies on 18th October 2015, entitled 'The Fed Board is now seriously split'
"On this view, she keeps saying that policy is “data determined” because that is precisely the case"
Which 'precisely' are you referring to Mr Davies? Clearly not the early 2014 target of 6.5% for unemployment. Definitely not the slimmed down 6% version either. The 5.5% version sounded pretty precise, but apparently not precise enough to outlive it's own achievement. How about the carbohydrate free 5% version? We're still at 5.1%, which was mysteriously deemed 'good enough' just a few weeks ago, but clearly precision is not giving up without a fight.
The Fed is not data dependent, the data is Fed dependent. Targets are changed to suit agendas, and even the raw data is twisted and tortured to suit government purposes - E.G. the non-annualised defence spending in Q3 2014 that produced the '5 handle' GDP figure just in time for the Congressional elections.
The Fed is a political organisation. God knows what sort of pressure Dr Yellen is under right now, but 'stress' wouldn't do it justice. Personally I think she is suffering, and totally ill suited to the shenanigans and late night phone-calls that she will be getting right now. Whilst I think her 'economics' is bunkum, she strikes me as a thoroughly decent person, who will not play the game with the same degree of guile and spin that we came to expect from her two predecessors - the Yoda like Mr Greenspan, who excelled at making gibberish sound like the wisdom of Confucius, and Dr Bernanke who is thoroughly grounded in his own hubris. I suspect President Obama will be ruing the fact that Congress wouldn't let him have his first choice for Chairman - Professor Summers is a very political animal, totally 'non-stick' and very good at making political drivel sound intellectually compelling.
The backdrop to this 'decision' is this:
1. A slowing China
2. Commodity markets at decade lows
3. An unwinding $9 trillion carry trade, much of it in emerging markets
4. An impending round of defaults in the shale space
5. A flatlining Japan
6. A European economy in chaos, struggling to cope with a massive influx of refugees, and a banking system that is still vulnerable
7. A war going on in Syria, with the US and Russia bombing each other's proxies
8. A fleet of US warships on it's way to the South China Sea to play chicken with the Chinese navy
9. Last but by no means least - an economic 'recovery' so fragile that a 20% decline in the S & P 500 risks sparking a panic and a 'risk-off' contagion - in a market that is so dependent on the tooth fairy that it has forgotten how to price risk
On the other side of the coin, if rates don't raise, the US is going to have a swathe of defaults in State and Municipal pensions, Illinois is teetering on the edge.
So, personally I think they're talking about easing not raising. Specifically I suspect they are considering the following for 2016:
b) Helicopter money in the form of tax rebates, infrastructure builds and student debt forgiveness
c) How to sell the idea of a cashless society
The world is entering recession; the central planners never know that until it's already 6-9 months old. In dollar terms it's already in one. To think that the Fed is not involved in discussions on responses like a) b) and c) is naive or disingenuous.
Data dependent? Yes, but not the data that they'd like us all to think.