The Fed Has No Idea What Happens Next – And That’s Okay
- Joshua M Brown
- March 11th, 2012
The Federal Reserve's FOMC is not omniscient nor should it pretend to be. No one thinks it is anyway, so why bother?
I've found a new religion over the last few years that has enabled me to accomplish quite a bit in business and in markets - admitting when I have no idea what's to come. Rather than manufacturing confidence that I know what's about to happen, I now prefer to display and feel the confidence that I'll know what to do when it does happen.
Take a moment and think about that concept, because it's a powerful one. Sure we need to make plans - but we also need to plan for our plans being rendered useless at the drop of a hat.
With that in mind, here's how the Fed is "positioned" headed into Tuesday's meeting, via Binyamin Appelbaum of the New York Times:
The Fed plans to complete by the end of June its current campaign to suppress long-term interest rates, keeping borrowing costs low for businesses and consumers. Some Fed officials see no reason for new measures, as the economy appears to be gaining strength. Others are eager for a new campaign, arguing that the recovery remains weak. But public remarks by Fed officials suggest a decision will not come before the committee’s next meeting in April.
First, there is a mystery to resolve: The Fed is not sure how fast the economy is growing. Some of the main measures, which produce a murky picture in the best of times, are now telling divergent stories. In particular, people do not appear to be buying enough goods and services to sustain the rising pace of job creation.
The Fed has absolutely no idea what comes next for the US economy. They couldn't possibly. There are macro forces at work and cross-currents swirling about that have never quite co-existed in the same economic environment before. Demographics, economics, market fundamentals, globalization, the financialization of commodities, currency and debt dynamics etc. Your mid-70's analogies are adorable, but fairly inapplicable for the current atmosphere.
I like that the Fed is leaking and jawboning out their own sense of befuddlement. The smart play is to shut up and be ready for anything when the data is so contradictory.
Investors ought to take a page from this playbook as well. You can place your bets here, but your confidence should be about your ability to deal with the future when it comes, not your vision of said future in this moment now.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.