Forward Guidance: The Fed Sounds Like A Wizard Reading Chicken Bones

Authorized by Mike Shedlock via MishTalk.com,

Stanley Druckenmiller says the Fed should get free of forward guidance and just do their job.

I totally endorse a view by Stan Druckenmiller, the Fed Should halt Forward Guidance.

Partial Video Transcript

Squawk Box:

I’ve been perplexed about the unwavering focus the Fed has had on cuts for a six period period. ... Did cuts make sense of the full time?

Druckenmiller:

I was perplexed with the December pivot. ...

To any degree it looks like they have been made on the 5-yard line with the game on the line. I remember saying to any of my partners, that’s the velocity I thought we might hear in March.

... Instead they set financial conditions on fire. ...

And erstwhile financial conditions took off, it became very clear this thing could go either way. More curiously, why they and others proceed to talk about, well, it’s not going to be six cuts it’s only going to be 3 cuts or 4 cuts.

I’m going, why are we even talking about cuts?

Become inflation, if you remember, we didtrillions of dollars of QE due to the fact that it was 1.7 percent alternatively of 2! But someway now that we are at 3 vs 2 we’ve got to start cutting rates to bring in a smooth landing. immense mistake. It goes back to Kevin Warsh, erstwhile he was in the moving for the Fed job, utilized to talk about reforming the Fed.

And I go Kevin, what is the major improvement that we do? He says We’ve got to get free of forward guidance.

When you put forward guide out, unlike me erstwhile I am crow, I trend to change my head very rapidly, they get trapped in the forward guide, stuck in it. ... Bizarrely, at the last press conference, the Fed seems to inactive be hanging on to this asymmetric direction of we are not going to hike and we anticipate to cut but we are going to wait for the data.

... I don’t know where inflation is going to be in a year, Powell doesn’t know. I don’t think anybody knows.

Squawk Box:

You think a hike is off the table? Definite?

Druckenmiller:

No, due to the fact that there’s not a zero percent chance inflation has bottommed. I don’t know. What I would do is just say nothing, and to what a Fed chair utilized to do: erstwhile you request to rise rates, rise them; erstwhile you request to cut rates, cut them.

Don’t go on 60 Minutes.

You are not a stone star. You’re the Fed chair.

You are expected to be moving monetary policy.

Bernanke did quite a few things I don’t feel good about. 1 of the values was forward guidance.

You have a bang of academics talking about sending a message to the markets.

I would alternatively rather them get free of forward guidance and just do their job.

The Fed is Uncertain About Uncertainty, So Why the Forward Guidance?

On September 22, 2023, briefly before the Fed’s pivot, I asked The Fed is Uncertain About Uncertainty, So Why the Forward Guidance?

The key words at the FOMC press conference is “uncertain” for good reason. The Fed doesn’t know what it’s doing.

Here is the image I posted then.

Image from the Fed FOMC projection materials.

Hoot of the Day

Actually, it’s good that the Fed is uncertain due to the fact that their results have not been close to the mark for a decade.

The above illustration is partially amusing. The Fed has only a 70 percent assurance level that curious rates 3 years from now will be in the scope of 0 to 5.5 percent.

That means the Fed results that 30 percent of the time, rates will be outside that range.

From 2012 to 2019 the Fed kept producing interest rate charts showing hikes that never happened.

Then the Fed decided it was essential to make up for catch of inflation.

Need to Make Up For deficiency of Inflation

Seeing quite a few inflation-related tweets...

Don’t forget to thank the folks at the @federalreserve who’ve been trying for years to express your cost of living. pic.twitter.com/W67bBgr8Wq

— Rudy Havenstein, elder Markets Commentator. (@RudyHavenstein) July 24, 2021

I’ve been discusing this for going on 2 decades.

Fed Uncertainty Principles

Flashback April 3, 2008 before the collapse of Lehman and Bear Stearns, to 1 of my all time favourite posts: Fed Uncertainty Principles

Most think the Fed follows marketplace results.

However, this make what would appear at first grade to be a major paradox: If the Fed is simply following marketplace expectations, can the Fed be to blame for the consequences? More pointedly, why is the marketplace to blame if the Fed is simply following marketplace results?

This is simply a very interesting theoretical question. While it’s actual the Fed typically only does what is expected, these results become distorted over time by observations of Fed actions.

For example: If marketplace partners are experiencing the Fed to cut on arrival and the Fed does, marketplace participants get into a psychology of excellence more cuts on more weakness. Here is another example: If marketplace partners anticipate the Fed to cut rates erstwhile economical stresses occurs, they will take positions based on these expectations. These effects cycles can be self-reinforcing.

The Observer Effects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economical picture. I liken this to Heisenberg’s Uncertainty chief where reflection of a subatomic particle changes the ability to measurement it obtainably.

The Fed, by its very existence, alters the economical horizon. Compounding the problem are all the eyes on the Fed attachment to game the system.

Fed Uncertainty chief Recap

Fed Uncertainty Basis Principles:
The fed, by its very existence, has completely upset the marketplace via self-reinforcing observation/participant feedback loops. Thus, it is fatally flawed logic to propose the Fed is simply following the market, so the marketplace is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be an observer/participant feedback loops either.

Corollary Number One:
The Fed has no thought where interest rates should be. Only a free marketplace does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to add), partially in times of economical stress.

Corollary Number Two: The government/quasi-government body bridge responsive for creating this mess (the Fed), will attemp a large power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will effort to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven them to not know what they are doing.

Corollary Number Three:
Don’t anticipate the Fed to learn from past mistakes. Instead, effect the Fed to repeat them with bigger and bigger dos of precisely what created the first problem.

Corollary Number Four:
The Fed simply does not care who its actions are illegal or not. The Fed is operating under the rule that it’s easy to get greaterness than perspective. And forceness is just another means to the desired power catch it is seeing.

And so here we are. inactive discussing the same things, with the Fed making the same mistakes.

The Fed’s large Problem

On average, the economy looks OK. But stories are missing. respective large groups of people are strugling. They all have 1 thing in common.

Case-Shiller home price index, CPI rent index, and the index of hourly learnings for production and nonsupervisory workers.

The Fed is now trapped in a box of its own making. Everyone who is priced out of a home is very unhappy with soaring rent, soaring home prices.

If the Fed cuts rates prematurely, what does that do to this housing prices?

For discretion, delight see The Fed’s large Problem, There Are 2 Economies But Only 1 Interest Rate

Meanwhile, Powell sounds like a visard reading chicken bones due to the fact that that’s truly all he is.