In my previous post, I criticized the FOMC’s recent changes in the name of transparency, and hoped that the new moves anticipated last week would partially erase one of them. Specifically, I had hoped that the anticipated addition of the Fed Funds targets of individual FOMC members—which I thought was a bad idea—would at least weaken their previous collective commitment to keep that rate at its near-zero level at least until mid-2013—which I also thought was a bad idea. I guess I was hoping that two wrongs would, if not make a right, at least sum to a total short of two. Instead, they made it worse.
Who would have thought that they would add the individual projections into the mix and, at the same time, strengthen the collective commitment by extending it from mid-2013 to late-2014? That added up to a six-year commitment to near-zero short-term interest rates. In doing that, they also set up a situation where the individual FOMC member forecasts of when those rates should rise would conflict with their collective commitment as a committee. I mainly object to the loss of policy flexibility associated with each of those factors, but an additional problem is that the disparate individual estimates or forecasts will weaken the policy impact of the collective estimate.
The new collective commitment was for the Funds rate to be near zero through 2014. But we now know that one member thinks it should be one-half percent and two think it should be one percent by the end of 2012. By the end of 2013, one member thinks it should be one-half percent, two think it should be three quarters (if I’m eyeballing the graph correctly), one thinks it should be one percent, one goes for one and three quarters percent, while one is shooting for two percent. In other words, for 2013, six members out of 17 (two positions are vacant) are above the announced consensus. For 2014, eleven members are above the consensus while only six members are at consensus (yes, you read that right). So, a majority of the members believe it should be above the consensus that the committee agreed to by vote.
When preparing to be interviewed by Larry Kudlow on CNBC last Thursday evening after the announcement, I listed my complaints in a note as (1) the earlier commitment to mid-2013, (2) the new commitment to late-2014, and (3) the committee’s ignoring of the better economic news of late. I thought the economy had improved considerably in recent weeks and months and that fact was being ignored by the committee. After the Friday morning GDP report, I must confess that I may have been wrong about that. I expected real GDP to have increased by more that the headline 2.8 percent rate. And, while I did expect inventory accumulation to inflate the number, I didn’t expect it to account for most of the increase. Touché to the FOMC’s forecasters on this point.