Monday, November 13, 2017

Here is what Gary Shilling would do to fix the Fed

"First thing I would do at the Fed is to get them out of the forecasting business. They’re lousy at it. The Fed did not forecast up until the early 90s. They didn’t even tell you what their federal funds target is. Their interest rates.

Guys would get this data every Wednesday night and they would massage the data the wee hours of the morning trying to figure out what is the target that the Fed has? Because they didn’t announce it.

More recently they’ve gotten bitten by the transparency bug and I think that was a product of the financial crisis. A lot of things were not transparent and these guys running the Fed are mere mortals and they saw ok transparency is the in thing to do so we’re going to be transparent. We’re going to tell the world what our plans are.

Well, the problem is that all their targets are data driven. And they admit this, but they’re very, very poor forecasters of the data. I mean they have perennially forecast more inflation than we’ve had. Perennially forecast sooner and more interest rate increases than they’ve put in. Perennially over forecast inflation. Economic growth.

I would just say, “You don’t have to forecast.” The Fed’s charter is that they’re supposed to promote full employment and price stability and they define as they want to. But it doesn't say anything that they have to forecast.

Matter of fact we did a study, we looked back in 1993, the Fed was not telling you what they were doing then. And quite out of the blue, starting in February they raised interest rates they raised them from 3% to 6% in a matter of seven months. Huge shock to the economy.

We looked at that relative to what they’ve done since December of 2015 when they started raising rates now. And they’ve only gone up 100 basis points, 1%. But they’ve told everybody what they’re going to do. The volatility back then with much greater interest rate increases compared to the volatility now was much less.

Now there are other things at work there but I think you can say that forward guidance has not been a success and it has strained the credibility of the Fed so I’d get out of the forward guidance, I’d get out of the forecasting business, publicly forecasting, sure they got to do it internally but I’d keep their mouth shut publicly."