I have chosen a provocative title, but it is fully justified. Fed officials are flying on autopilot, but the controls don’t work anymore, or at least not reliably. Fed watchers are largely clueless. The investment community and the economy may be collateral damage.
Let me begin by briefly reviewing the recent past. All through last year, Fed officials were signaling they would begin a program of rate increases. At first, there were going to be 8 increases of one quarter point. As the year progressed, the first increase faded into the future. Finally, in December 2015, the Fed finally hiked its new interest-rate targets by 25 basis points. In my opinion, the FOMC did so largely to keep its credibility.
At the time, I wrote that “the chief effect of Wednesday’s action and accompanying statement is to once again increase uncertainty in financial markets” (O’Driscoll 2015). I became convinced that, promises to the contrary notwithstanding, the Fed would not raise interest rates again before December 2016. Instead, policymakers would dither all year. I forecast the earliest rate hike would be in December 2016. Note, I did not predict the Fed would actually raise rates this December, just that they would not do so before. I think I have been vindicated.