Proof the Federal Reserve Has No Idea What It's Doing

The minutes from last month's Federal Open Market Committee (FOMC) meeting provided zero clarity on the U.S. Federal Reserve's plans to raise interest rates in 2015.

The markets need to know when the Federal Reserve might raise interest rates, or at least what economic conditions it will use to make the decision.

But the minutes released yesterday (Wednesday) from the Oct. 28-29 FOMC meeting provide plenty of escape hatches.

Federal ReserveIn short, any Fed action in 2015 on interest rates rests not just on the economic data, but also on how the FOMC members decide to interpret that data.

Of course anyone who has followed the Fed over the past few years knows that its economic data-based guidance is hogwash.

Remember back in late 2012 when the FOMC members said they'd start raising interest rates after unemployment fell below 6.5%?

Well, in April unemployment hit 6.3%. In October the jobless rate fell to 5.8%.

But all we get from the Federal Reserve is more waffling. The economic targets that would trigger action get increasingly vague.

And contradictory statements from several Fed members both before and after that October FOMC meeting have further muddied the picture.

"It's all proof they have no idea what they're doing," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "They're just making it up as they go along."

FOMC Minutes Show the Goalposts Have Moved Again

According to the FOMC minutes, the falling jobless rate isn't good enough anymore. Now the FOMC is studying the "underutilization of labor resources." That means the Fed is looking past the government's phony U3 unemployment number and considering the nation's underemployed and discouraged workers.

That's fine, but it moves the goalposts. Investors need consistency from their central bank policymakers.

Meanwhile, the Fed members make things worse by publicly voicing their uncertainty.

Just look at some of these quotes...

Over the past two months, some Federal Reserve members have dropped hints that they will raise rates at a 2015 FOMC meeting, while others caution it's "too soon." In some cases, these dual signals have been sent by the same person (more on that later).

Most of the mixed messages concern inflation, which the Fed would like to see at 2% before hiking rates. Core inflation is 1.7% now.

"There's tremendous disagreement in the Fed about what to do," explained Fitz-Gerald, a seasoned market analyst with 33 years of experience. "I think they just want to get all their concerns on the record in case something goes wrong."

For example, at least two Fed members openly worried about the FOMC repeating the "mistake of 1937." Back then, the Fed prematurely raised interest rates, pushing a U.S. economy that had barely recovered from the Great Depression back into a recession.

"I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions," Chicago Fed President Charles Evans said in a Sept. 24 speech. "The U.S. experience during the Great Depression - in particular, in 1937 - is a classic example for monetary historians."

Two days earlier, New York Fed President William C. Dudley called the 1937 episode "a horrible mistake."

And yet last week Dudley seemed far less concerned about jumping the gun on raising interest rates.

"I think the market expectations that expect us to lift off sometime around the middle or somewhat later next year are reasonable expectations," Dudley said in a Nov. 13 speech.

Of course, he added this caveat: "No, I cannot give you more specifics and the long answer is: because I do not know. It really depends on how the economy evolves and how we progress toward our objectives of maximum sustainable employment in the context of price stability."

More Mixed Messages from the Federal Reserve

Meanwhile, Minneapolis Fed President Narayana Kocherlakota said last Wednesday that raising rates in 2015 would be "inappropriate."

That same day Philadelphia Fed President Charles Plosser said the FOMC should raise interest rates "sooner rather than later."

Then there's Dallas Fed President Richard Fisher, who last Monday sort of predicted a rate hike in the first half of 2015: "The markets assume that it will happen in summer. I think it could happen earlier - but of course I could be wrong."

Fed Governor Jerome Powell managed to push opposite points of view in the same CNBC interview.

"If we stay on the current path it would make sense to raise rates some time during 2015, perhaps in the middle of 2015," Powell said before immediately backtracking.

"The time to raise rates is coming, it's not here yet," he said, citing too-low inflation. "I'd love to be the one who sees inflation coming first but I just don't see it."

All this tells us one thing.

"The Fed is flying by the seat of its pants," said Fitz-Gerald. "They're engaged in a colossal game of kick the can, and it's not in the best interest of the American people."

The Bottom Line: Somebody please find these guys a monetary policy. Investors should not have to deal with this.



Fed Confusion or Fed Fear? As the Federal Reserve fumbles for an interest rate policy, it never talks about its serious conflict of interest. This is a problem rooted in the just-concluded "quantitative easing" policy. And it means that higher rates would create a crisis the Fed would rather not face...

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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