When the Fed thinks it's smarter than the market, dark days are coming
One of the rarely-talked-about reasons for the latest market rout market is a sign that Fed leadership believes it can inspire economic growth by raising rates.
Former Wells Fargo CEO Richard Kovacevich was on CNBC today talking about monetary policy and he delivered an argument that's gaining support at the Federal Reserve. He said a hike now would reduce uncertainty and signal confidence in the economy.
The Fed Minutes had an ominous sign that almost everyone missed
"It was also noted that a prompt start to normalization would likely convey the Committee's confidence in prospects for the economy," the Minutes said.
"It was noted" is a code-word that usually means it was said by the Fed Chairman.
It takes a breathtaking amount of arrogance for a Fed Chair to believe she is smarter than the market. That rises to dangerous levels when she believes that she's so smart, so omnipotent that people will believe her forecast rather than signals from millions of market participants and their individual assessments of the economy.
If the latest market rout hasn't disabused Yellen of that idea, she's in a fantasy land.
It's also an affront to history. The Fed has confidently forecast better growth every year since 2008 and every year they've overestimated the economy.
St Louis Fed President James Bullard put it best. "If you've followed my forecasts, you've probably lost a lot of money," he said in 2013.
Markets are losing confidence in the ability of Fed policymakers to understand the disinflationary global dynamics of a strong US dollar and struggling emerging markets. Instead, the Fed has this nagging desire to raise rates in order to get back to normal.
We could be three weeks away from a period where markets have no confidence in the economy and no confidence in the Fed. That's a recipe for the kind of decline in markets we've seen over the past week -- and much more.
