THE BLOG
09/15/2014 01:23 pm ET Updated Nov 15, 2014

Too Clever by Half

It is one thing to read the "so-called" Fed tea leave and another to be so tied to your point-of-view that you ignore the writing in front of you, and instead attempt to read between the lines.

Most of the confusion over Federal Reserve monetary policy over the last year and a half has been due to so-called experts defending their mistaken analysis rather than confusing cross signals from the Fed.

I understand that I have been somewhat of an outlier on Fed issues as their policy path over the last year has appeared perfectly clear to me. Former Fed Chief Ben Bernanke announced last year that the Fed would at some point begin tapering its assets purchases (QE3), probably before the end of the year. This was at his June press conference. A month earlier he indicated that tapering could begin over the next few meetings. He also said --ad nauseam -- that any policy shift would be data dependent.

After the June 2013 press conference most analysts targeted the September 2013 meeting as the beginning of tapering. I agreed with the assessment. But in the months following that statement, the jobs data came in much weaker than expected. When Bernanke said any policy shift would be data-dependent, he actually meant it. I understand some analysts dismiss such qualifications, but it is why they got it wrong. Based on the numbers it was clear the Fed would not begin to taper at the September meeting. Add to this that Congress was threatening another government shutdown and a possible default and it jeopardized the yearend target.

Fortunately -- depending on your perspective, I guess -- cooler minds prevailed in Congress and the jobs picture improved in the last quarter allowing the Fed to stick to the yearend target announcing a taper after the December meeting.

In responding to a question at her first press conference new Fed Chair Janet Yellen famously suggested that actual tightening could begin as soon as six months after the end of tapering. This shocked many who saw Yellen as more of a dove than Bernanke, but it really should be taken in context. One, she was responded to a specific question and two the qualification that any policy shift would be data dependent remained in place.

Assuming the economy continued to grow and the Fed was anxious to end the asset purchases this put the earliest possible tightening around the beginning of the second quarter. This was not as earth shaking as it appeared. And people began to question Yellen's dovish credentials when she carried on the taper through some soft first quarter 2014 numbers.

As the economy picked up and a string of 200K plus non-farm payroll reports (ending with the August report) analysts began to worry or project a closer onset of actual tightening.

But all along a majority of analysts and the Fed Funds futures market were indicating a taper by the end of the second quarter/beginning of third quarter 2015. Some pessimists looked out to the end of 2015, but that is not that big of a window, with all that interim data to be considered.

All the recent August jobs number did was end the speculation that a tapering could come at the earlier stage Yellen said was possible -- which no one believed anyway.

Of course the real problem is that in a typical recovery -- we are going on five years now -- the Fed Funds rate would be at a level nearing what in the past could be described as an equilibrium level. A place where, if the recovery was looking like it could falter -- not something unexpected five years into a recovery -- the Fed would be in position to add some stimulus.

That perhaps is the criticism that Fed should face, not its forward guidance -- which has been remarkably clear from my perspective -- but the fact that it has now left itself without many options if the economy turns sour again.

Remember the Fed could have stayed true to its pledge of keeping rates at "a highly accommodative stance of monetary policy" with rate of one percent or two percent. During the recession of 1990-91, which cost the first President Bush his job, the Fed Funds rate bottomed out at three percent.

It would be nice to end the accommodation from the credit crisis before the next crisis is upon us.