Federal Reserve Fools Chicken Little Again!

Can US Federal Reserve Chair Janet Yellen Fool the Markets yet again? My guess is no, but that just shows that I am as gullible as Charlie Brown.

Janet Yellen is the Lucy of Central Bankers. 

Today, the Federal Reserve will announce plans for future interest rate increases. My prediction is that the Fed will surprise the financial market in the opposite way that it has for years. My prediction suggests that I am a poor student of The US Federal Reserve, and of human nature more generally.

By way of background, the Fed can be either "Dovish" or "Hawkish". Dovish means print money, keep interest rates low, promote spending over saving. Hawkish means the reverse. For the last decade the US Federal Reserve has been incredibly dovish. 

What is even more amazing is that not only has the Fed been dovish, it has fooled the financial market over and over again by becoming more dovish. 

For example, last year the Fed told us they would raise interest rates four times in 2016; their last pronouncement was a much more dovish two rate rises this year. 

Commenting on this extra dollop of Dovishness last month, Goldman, Sachs wrote

Goldman Sachs: This Was One of the Most Dovish Fed Decisions of the 21st Century ... they Surprised. 

A more numerical measurement of surprise can be found by looking at Treasury bond prices. Treasury bonds are issued at a price of $100. Any price above one hundred means that the yield on the bond is lower than it was at issue. 

Bonds prices above $100 can be viewed as evidence of the market being surprised. Almost every Treasury bond in existence sells for more than $100 - so the market has been surprised almost every day for years. 

Treasury Bond Prices reveal dovish surprises

The best prediction of future behavior is past behavior. Thus, a smart analyst would predict that the US Fed will surprise us to the dovish side today. 

However, I am not smart. I think the Fed will surprise to the Hawkish side today. 

Why the hawkish prediction? The Fed has a dual mandate of price stability and full employment. Oil prices have almost doubled recently, core inflation is rising, the unemployment rate is 5%. Thus, there is no justification for the Fed to continue super dovish monetary policy. Furthermore, the Fed will not want to raise rates right before the November Presidential election. 

Thus, the Fed needs to raise rates soon.  

I feel like Charlie Brown. I know that Janet Yellen is going to fool me, but I don't really believe that it will happen to me yet again. 

My future

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