It has been an interesting week for Fed observers and markets. There is an odd disconnect between the data that we are told the Fed depends on and the press release and follow-on press conference that the FOMC conducts after its meetings. But clearly the market likes it that way. This week’s Outside the Box deals with the philosophical issue of the Federal Reserve setting the price of money. My friend and well-known value investor Vitaliy Katsenelson goes back to his youth in Russia, where some bureaucrat arbitrarily set the price of sugar, and likens that to the Fed setting the price of money – or interest rates. We all intuitively understand that a bureaucrat setting the price of sugar is a dumb idea. Yet the market seemingly loves having the Fed set the price of money.
But before we jump into Vitaliy’s short but very thoughtful essay, I think the perfect set-up in is a note I got from my friend Peter Boockvar, who writes for The Lindsay Group. Every time I get in the room with Peter I come away with several nuggets to meditate on. Let’s just jump into his remarks without a lot of comment:
For the past few years the Fed has been chipping away at the concept that they are driving monetary policy dependent on the data that they see. We know that because they kept changing the rules of the game in that every time a goal was reached the goal was altered. Well, I believe it is safe to say that after yesterday’s FOMC statement, the Yellen press conference and what was said in them, the communication and structural strategy of ‘data dependency’ has been officially neutered. The Fed’s goal is now a perfect world. As we of course will never get there, the rest of us are left flying blind as to what to expect from monetary policy.
This post was published at Mauldin Economics on MARCH 18, 2016.
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