At The Fed: A Picture is Worth 1000 Words

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At The Fed: A Picture is Worth 1000 Words

To the Fed: A Picture is Worth 1000 Words by David Merkel, CFA of The Aleph Blog

The FOMC statements are much longer than they used to be, and as such, are less clear, giving faulty signals to the markets.  If language is not likely to change much  for a while, why not drop the language  entirely, especially in cases where it affirms ideas that are obvious.

We may all know people in our lives who will say more and more if you don’t agree with them, because if you don’t agree with them, you don’t understand.  More words will bring clarity to you, and you will understand.  But what if they are nuts, and you are a sane person?  This is how I think about the FOMC — they are bad forecasters, and they don’t understand how weak monetary policy is in a period where there is too much debt.

So let’s try some pictures to replace the words of the FOMC:

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As I have said before, the FOMC is composed of overly optimistic neoclassical economists, who don’t know that their theories don’t work when and economy is too indebted. They think: Real growth is our birthright, and price inflation promotes growth.  Neither are true.

FED FOMC unemployment rate

Note that they have been consistently pessimistic on the unemployment rate, flawed measure that it is.  Thus they think they need to keep monetary loose.

FED FOMC PCE inflation

Their views of PCE inflation reflect a view that monetary policy can easily achieve a 2% rate of inflation in the long run.  Pray tell, when have actions of the FOMC ever led to an equilibrium result?

Aside from that, the PCE index does not fairly represent inflation for the average person in the economy.  Maybe it reflects what the rich experience.

FOMC Fed fund rates

This is a study in contrasts.  They were once more optimistic that Fed Funds rates would rise sooner, and that has not happened.  That said, they are now more certain that the Fed Funds rate will rise significantly in 2016.  As for the long run they are getting more pessimistic about economic growth, at least in their Fed Funds forecasts.

FOMC Fed tightening

This is another example of where the FOMC should take a step back, and not try to interpret every short-term wiggle.  As a group, they whipsawed in their view of when tightening would happen over the last three datapoints, when I would not have changed much.

To the Fed I say, “Say less, and provide more graphs.”  I understand that you don’t want to discredit yourselves because you are bad forecasters, but maybe you could get your points across in a more potent way by not diluting your message by many needless words.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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