Hyperactive Fed
The recent revelation that the Fed is now going to broadcast anticipated future interest rate policies has invigorated the economists in the street and elsewhere as they wasted no time "predicting" the impact of the change. One has to say it is a welcome change from the previous regime when rock star monetary policy makers lived to shock and awe the market at every available opportunity. The biggest of them all, had argued that to get the "right effect," one has to make a policy change that is completely unexpected. And, he certainly got the effects, but not the ones he expected and the regime led a whole generation into despair.
Now, a more intelligent and educated policy maker has initiated a regime of transparency – the exact opposite of what was practiced before. This brilliant insight has been with us for over 50 years now – the idea that reducing uncertainty about future interest rates has the highest value for the economy. As universities around the world shower PhDs on every conceivable empirical work, they miss one important idea – insights are more important than eating data for breakfast, lunch and dinner. The policy makers of yesteryear have indeed been very proud of their empiricism – as they regressed and analyzed every piece of noise that was unearthed from the guts of the economy.
Having a stable interest rate regime and broadcasting it to the market is a good policy. However, there is even a better policy – just let the market know what your money targets are, shut the doors behind you and go home. Spend time with your children as we already know the enigmatic tweaking that goes on behind the walls in Washington and a whole industry that makes their living forecasting and predicting what the Fed will do as they scavenge the streets littered with corpses of small businesses, unable to cope with the uncertainty, destroy significant economic value.
It is time to return to simplicity. Markets are more efficient at setting interest rates. The likelihood of a dozen bureaucrats knowing more is unlikely – if they did , they would not be in their jobs.
