For once, it does seem like the FOMC was asking of its members the right question. They spent years incredulous over the lack of effect due to whatever of the multiple QE’s without changing expectations. No matter how little evidence for their initial let alone ongoing success, they would always, always keep up the “recovery is coming” narrative. In many ways it was contradictory because one of Ben Bernanke’s signature efforts was to open up the central bank to become the exact opposite of the closed off black box that it was before the 1990’s. In many ways he succeeded, as there is today far more public information about what the Fed is doing.

In many other facets, however, he didn’t even try. Among the latter class remains ferbus and the rest, those DSGE and ARCH models that practically run monetary policy and more than that monetary thought. The FOMC doesn’t consider anything without first consulting their Oracle, the computer-based regressions that quite frankly haven’t got a single thing right in at least a decade.

That comes at the expense of intuition. Operating rigidly by statistical analysis is openly constraining. Nobody claims there isn’t any value in modeling economic behavior, or trying to quantify the potential effects of a change in monetary conditions. But doing so religiously has stunted their collective imagination in a way that becomes engrained as bad institutional behavior. I don’t want to say it’s laziness, but it is surely something like it. As Alan Greenspan said in June 2003:

We need to know how the system tends to work to be able to make the necessary judgments without asking one of our skilled technical practitioners to go off and run three correlations between X, Y, and Z. So I think the notion of building up our knowledge generally as a basis for functioning effectively is exceptionally important…Even if we never have to use the knowledge for the purpose of fighting deflation, I will bet that we will find it useful for other purposes.

Flying blind as they have been, that is exactly what happened. In 2007, confronted with what the models uniformly described as impossible, they yet referred back to the same models in order to figure out how to handle the impossible. Like stunned children, they knew not what else to do so they did only what they always do; a complete failure of imagination. The results of that process were unsurprisingly disastrous. Furthermore, they remain so.

That might be a symptom of bureaucracy, a condition never known to be favorable to creativity and thinking outside the box. The Fed excelled in little more than hardening the borders of its box, making sure little thought ever escaped its boundaries.

Here we are in May 2017, though, when yet again the models are confronted with the routine of “unexpected” weakness that is so regular economists haven’t bothered to come up with another name for it. For the fourth year running, the economy and especially consumers have experienced “transitory” weakness. From the latest FOMC minutes:

Although the incoming data showed that aggregate spending in the first quarter had been weaker than participants had expected, they viewed the slowing as likely to be transitory.

There had to be something residual in that expectation, for why else would they be surprised at such softness? The main point of contention continues to be the unemployment rate. At 4.5%, even a lower growth economy should be by all regression rules generating a more than detectable acceleration in wages and therefore prices.

Readings on headline and core PCE price inflation in March had come in lower than expected. On a 12-month basis, headline PCE price inflation had edged above the Committee’s 2 percent objective in February, but this measure dropped back to 1.8 percent in March, in part reflecting the effects of lower energy prices on the headline index. Core PCE price inflation, which historically has been a good predictor of future headline inflation, moved down to 1.6 percent over the 12 months ending in March.

The FOMC apparently then discussed the “quality-adjusted prices for wireless telephone service” as a possible explanation for the lack of price momentum in the core metric. I’m sorry, but if you are reduced to in a monetary policy meeting debating the merits of the BEA’s treatment of cellphone plans and the capabilities of the devices offered by mobile network carriers, you are trying way too hard. The situation with consumer prices is contrarily very easy to understand:

The PCE Deflator index was 2.12% higher in February 2017 than February 2016. Though rhetoric surrounding this result is often heated, the actual indicated inflation is decidedly not despite breaking above for once. In many ways 2.12% is hugely disappointing, at least for policymakers and those in the media cheering them. For consumers there is no good amount of inflation.

 

If it took a nearly 80% rise in WTI just to generate calculated inflation barely above the target mark, then nothing really has changed. As the base effects of oil pass into history, so will the Fed’s chance to claim success in the one place where “money printing” should make all the difference. Instead, it was the “dollar” working through oil prices that moved inflation and will keep doing so, leaving WTI the only thing that matters and monetary policy as it has been for a very long time – irrelevant.

It may not seem like much, but I detect a small but detectible (sorry for the tautology) seed of doubt being expressed about their models. The debate about wireless telephone services and the effect on overall consumer prices can be seen another way; investigating doubts about the models so as to figure out if there may be a legitimate explanation for why they are wrong yet again. You might take the view of “what took them so long” and it is hard not to see it that way, and there is nothing wrong with doing so.

But for market action, despite all the outward claims of “hawkishness” the message overall seems to be maybe not the Fed turning cautious but it perhaps thinking about turning cautious. Eurodollar futures that had been down fractionally to that point today rallied noticeably on the release of the minutes (as did UST’s).

It has been this way ever since the last “rate hike” more than two months ago. The narrative is that things are improving and as I have written before the Fed outwardly surely has an interest in as many people as possible thinking that. Internally, however, they may not be so sure and on these occasions where they have to put something out to the public it’s almost as if they are crying for help for someone to save them from themselves – to be released from the models whose only setting seems to be “transitory.” Even the most stubborn of rats can take the electric shock only so many times before trying the other half of the maze.

Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.

I don’t recall the FOMC ever before challenging their models to “prove it.” In early 2015 when confronted with nearly the same situation but to a larger and more dangerous extent, they waited to “raise rates” but never so openly refuting their established position. As CNBC described in May 2015 about the April 2015 minutes:

Meeting minutes show a Fed Open Market Committee with little concern about growth, even though they detailed a laundry list of weak spots that included industrial production, housing and investment…

 

Despite their mostly dismissive tone, FOMC officials nevertheless decided against increasing the committee’s benchmark interest rate, a nonmove telegraphed at the March meeting.

At that time, no matter how much current evidence against it, the modeled economy that “should be” ruled all official perception. Between then and last year, it all changed.  A few meetings back, for February 2017, the FOMC made it official about including “fan charts” in their presentation materials. Their reasoning was clear though not so explicit, meaning:

Again, it is an incredibly odd rearrangement of priorities, where the Fed wishes for us to start believing in them again because they now want to show how their models were actually less certain than you were led to believe they were; and that their predictions weren’t wrong, the economy that resulted was just in a different part of the probability “cone” or “fan” than they claimed contemporarily.

 

The whole thing is instead illustrative of only one thing, and it has actually little to do with accuracy, predictions, or models. The Fed in 2016, as fan charts were first brought up officially at the January 2016 FOMC meeting, finally admitted it had a credibility problem and could no longer afford, quite literally, to keep claiming QE had worked and would work. The Committee looks now to rewrite its own history so as to say that they only thought QE could have worked but overall they were uncertain about it the whole time (they swear). They just didn’t say so then, so they might as well start saying so now as if that might help correct their credibility problem.

Weakness is transitory, but maybe it’s not. Act accordingly.