The Federal Reserve is meeting for its September conclave today. On the agenda: What will happen to interest rates?
What to know
1. “The Fed” includes 12 regional Federal Reserves. Their locations are a map of the U.S. economy in 1912, only three west of Chicago and one west of Dallas.
They each have their own boards of directors and presidents drawn from their local regions. There are a few bright lights among the regional presidents (very few).
The New York Fed president is close to policy decisions — but ignore all of the others, despite important-sounding news coverage.
2. Fed decisions are made by the chair, vice chair and five other governors appointed by the President and confirmed by the Senate.
The Fed today is short-handed by two; rock-headed Senator Shelby, chair of Senate Banking, refusing to forward good Obama appointments. This group very rarely dissents from a chair decision. Hang on to every public word!
3. Whether the Fed hikes or not at this meeting does not matter.
[Tweet “Whether the Fed hikes this week does not matter. The future pace of hikes does, though.”]
4. Fed hints at the future pace of hikes does matter a great deal. Attached to this meeting’s post-meeting statement will be new economic forecasts and a scattergram estimate of future hikes. Although cluttered by dot-scatter from regional idiots, the change in the scattergram will speak loudly.
6. In Fed meeting minutes (we’ll have to wait three weeks for those), the governors are known as “members.” Pay attention to them and the staff. We’ll see staff commentary in the economic forecast on Wednesday, and in detail with the minutes.
…And what to ignore
6. In Fed meeting minutes, the regional presidents are described as “participants.” Ignore any thought the minutes ascribe to them.
7. Much jaw-jaw will be devoted to potential U.S. inflation and overheating. That’s just filler, and thinking by those who have not noticed changes in the outside world since 1990.
The Fed is the world’s central bank, and foreign conditions are paramount. All of the world’s central banks are standing on the gas pedal, and it does not make a lot of sense for the Fed to step on brakes.
8. The Fed’s greatest burden: What if we’re wrong? Dignified at the Fed by this label: “balance of risks.”
Every potential Fed action or inaction is risky, but today’s risks are asymmetric: if we’re too slow we can speed up; but if we’re too aggressive now, and we crater the economy, we can’t fix that. Sleep well in knowledge that overconfidence is not welcome at the Fed.
9. Two common ideas pushed by some at the Fed, many outside, and the click-happy press: Higher rates would help the economy by helping savers, and better to tighten a little now rather than a lot later. Ignore these nincompoops.
10. The Fed’s worst problem: It and all other fine economists (and investment houses and traders) rely on back-looking models. Since the great recession all have been misleading to the strong side, and no one knows how to repair the models.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
