Fed Chair Janet Yellen has been harping about the “uncertain” outlook for the US economy for years on end.
Perhaps this was inspiration for economists to devise an absurd new index that allegedly measures the amount of uncertainty in the economy.
Before diving into measures of uncertainty, let’s view a few Yellen uncertainty citations.
- March 29, 2016: Yellen: The Outlook, Uncertainty, and Monetary Policy
- February 10, 2016: Outlook ‘Uncertain’ For Global Economy, Yellen Tells Congress
- July 15, 2014: Janet Yellen: ‘Considerable Uncertainty’ In US Economic Outlook
A quick search turns up dozens of such links.
On April 17, Davis Rosenberg said Janet Yellen’s use of one word tells us something has gone wrong.
In a truly seminal speech on March 29th, Janet Yellen used the title, The Outlook, Uncertainty, and Monetary Policy.
I have been in this business for 30 years and have never seen a central bank chief slip the word “uncertainty” into the headline.
Not just that, but she invoked the term no fewer than 10 times to describe the domestic and global macro and market backdrop — this even as we pass seven years since the worst point of the Great Recession and seven years into the most radical easing of monetary policy in recorded history.
It begs the question: what has gone wrong?
Facts of Life
Caroline Baum, one of my favorite economic writers (on Bloomberg for many years until they stopped using much of her material in favor of garbage), has an excellent column on uncertainty on MarketWatch.
Please consider Opinion: Uncertainty is a Fact of Life, So Get Used to It, by Caroline Baum.
A group of economists have put together an economic policy uncertainty index. It’s not certain what the value of this index is.
My day begins with uncertainty. Will the rain hold off until this evening, as the weather forecast suggests? Or should I dash out to mow the lawn now in case it starts to drizzle this afternoon?
I boot up my computer to find a host of uncertainties confronting me. I read that U.S. stocks are starting the week in the red because of uncertainty over the Federal Reserve’s meeting this week.
Then there’s the first look at first-quarter U.S. gross domestic product on Friday. Will it be as soft as the Atlanta Fed’s GDPNow predicts, an annualized growth rate of 0.4%? Or will it be closer to 1.3%, the average of economists polled by the Wall Street Journal?
That’s just a taste of the certain uncertainties. What about uncertain uncertainties, such as a terrorist attack or a coup in some foreign country? An out-of-nowhere event that could rattle financial markets? Perhaps some newly unearthed revelation will disqualify one of the U.S. presidential contenders. (OK, if Hillary Clinton’s shenanigans haven’t dented her front-runner status by now, maybe nothing will.)
Uncertain uncertainties — the equivalent of former Defense Secretary Donald Rumsfeld’s “unknown unknowns” — are a fact of life. So man up, you wusses!
It is axiomatic that markets hate uncertainty. That overused phrase has been around so long that it’s impossible to determine the source. Which is just as well since the whole idea is pretty silly.
Fed Uncertainly Principle
Baum’s humorously correct anecdotes on uncertainty reminds me of one of my favorite posts: Fed Uncertainty Principle.
The Observer Affects The Observed
The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.
The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.
A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did.
What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment.
Here is a recap of the Fed Uncertainty Principle and its corollaries as I wrote them on April 3, 2008, before the crash.
Fed Uncertainty Principle:
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market 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 observer/participant feedback loops either.
Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two:
The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three:
Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
If and when the economists are ever “certain” about the economy, I am certain they will be wrong. Meanwhile attempts to measure uncertainty are ridiculous.
Mike “Mish” Shedlock
Yancey Ward said:
Baum is correct- uncertainty is never the problem. The problems arise and grow to stupendous proportions when people are “certain” of an outcome- that is how you get everyone on the same side of the of the damned boat. Just to illustrate, how is it possible for 10Y Japanese bonds to trade with negative rates- it makes no logical sense on the surface? They do so because people are “certain” they will be able to sell them to someone else at an even lower rate and get the gain that way.
Of course, the dangers never actually go away, they just appear to- and their time of resurrection are uncertain, too. The Fed’s attempts at using forward guidance are preposterous in the end. I think, maybe, Yellen is starting to grasp this, but is now trapped. Perhaps, in the future, the Fed will base policy rates on on Lottery balls. It couldn’t possibly be worse.
Tony Bennett said:
“The problems arise and grow to stupendous proportions when people are “certain” of an outcome- that is how you get everyone on the same side of the of the damned boatt”
Look no further than the trouble in hedge fund land. Funds are closing down as they can’t beat long only indexes. So much for actually hedging your bets.
Allen Bennett said:
To engage in such a dialogue or chain of thought gives the Fed a legitimacy it does not deserve. The Fed originated as a con and has remained true to its roots, in contemporary form a flagrantly hubristic Zioglobalist theft vehicle. Once the Fed is eliminated, there will be less uncertainty, especially concerning the honest pricing of risk.
” The Fed has no idea where interest rates should be. ”
But they know where interest rates should not be
they should not be at 0. And insane is Negative.
It is strictly insane to believe it appropriate that
I will pay you to borrow my money.
ERGO the FED is Obviously Corrupted by Politics
It is clear and convincing proof that the FED is told what to do.
I can’t see into Yellen’s mind.
Is she uncertain because she is reciting an econ 101 mantra? Is it only a word that, to her, means “cloudy with a chance of rain or maybe not” as a simpleton might utter a phrase? Is she gaining insight into what damage she has been a part of causing? Is she paralyzed by fear in what to encourage her colleagues to do next? Is she just blowing smoke and has the pressure and words from others turned her into a cold, calculating public official?
Personally, I think she is reciting econ 101 phraseology and has developed a little insight into the damage she has helped create and as gone mentally limp at how to fix it. She’s phoning it in.
BTW, by “damage” I mean rates that have been too low for much too long and accommodation in the form of debt monetization that need to be stopped. Let the balance sheet run down.
Interest rates need to rise in spite of the ancillary costs – which will be considerable in the financial markets but not much anywhere else. Higher rates will provide interest income that will enable spending to increase and lifestyles to improve.
The Fed caused the problem they are trying to fix and their cure is making it worse. Backing out and letting rates rise is the cure, although some pain will accompany the fix.
About the only cure is honest money, held out of the Fed’s hands, the time value of which should be determined by it’s holders, users, lenders and borrowers.
As in the original concept that the government has no money, it belongs to the people, and is held in trust for them in the form of revenue to pay for only those services described in the Constitution.
“It’ ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain
Finally, the alternative blogs are realizing the Fed is above the law.
Tony Bennett said:
Steven Seagal for Chairman?
Seagal was also a musician, but we already had one. Alan Greenspan was a musician too, trained at Juilliard School of music early in life, but soon discovered that he wasn’t as good as he originally had thought. Later in life, he became the Federal Reserve Chairman. I wonder how long he was in that position before he discovered he was wrong? Maybe we should try a doctor this time… Ron Paul is a doctor.
Yellen is always ‘uncertain’ about how to plausibly spin the existing Fed-generated chaos in a believable tale of growth.
True, but she seems quite certain about one thing. That she must run faster and faster to stay in the same place. I wonder if she dresses up like the Red Queen for Halloween?
Tony Bennett said:
I quit him a few years ago when he went bullish (after getting several $million/yr guaranteed). Two of his calls at the time
long loonie vs $US. Though rallying a bit lately … you would have been utterly crushed on that trade (close to parity at the time).
US inflation from all things — wage increase push.
Janet has regular transient ischemic attacks, mini strokes. She imagines her future is uncertain. We know brain farts end with a certain finality.
Stupid pandering to the .1% that has access to their free money has become the Fed’s sole policy. Fed members should be in jail.
I remember when I was single… Go to the fridge and smell whatever you take out. I wonder if it ever occurred to the Fed to do the same?
Eric Blood Axe said:
I wish people would stop “Begging The Question”, when they mean “Asking the Question!”.
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Ours won’t be the first civilization to fail because we were bad at math. We will however be the first to come close to getting it right and then still blowing it. At least we discovered the importance of non linearity, developed and were fascinated by the coupled non linear equations of Chaos theory, and applied same to macro economics, per Steve Keen, and thus correctly extended their application to the stocks and flows of macro economic modeling.
But then Paul Krugman and Janet said no, no way, not on my watch you don’t. No differentisl equations on my watch. Not on your life.
And so it goes.
Yesterday it was reported that, William Kristol, neocon editor of the Weekly Standard, talked about 3rd party candidates in the event of a Trump win. Kristol has had a ubiquitous presence in the RNC during conventions of the last 20 or more years. He figures that, without endorsing Hillary, he can run a 3rd party candidacy to take votes away from Trump and give the election to Hillary – yet still regain control of the GOP in 2020.