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Forward Guidance Now Nightmare For The Fed

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    September 29, 2014

    Janet Yellen is probably sorry Ben Bernanke ever embarked on his program of the Fed providing ‘transparency’ in its decision making, and ‘forward guidance’ for markets.

    It was helpful and fairly easy for five years when the need for more and more stimulus to get the economy going was clear.

    But now that it is wrestling with when it may need to begin raising interest rates and get out of the market manipulation business, transparency is only revealing the Fed’s uncertainty as to how to go about it and when to commence.

    It’s first forward guidance was that it would begin raising rates when the unemployment rate got down to 6.5%. It tried changing to a lower number when the rate began falling faster than it expected, then gave up on the unemployment rate approach, and shifted to trying a calendar date approach.

    It first talked about rates staying low into 2016. But as the economy picked up strength again it has pulled that in to 2015. With some FOMC governors pushing for next March, and even a few voices for late this year, the Fed is scrambling to give itself enough room to take the only sensible approach, which is to let the economy dictate when rates can begin to rise.

    Meanwhile, investors are now trained to hang on to every phrase and nuance in the FOMC statement and remarks by Fed Chair Yellen.

    Although the Fed has switched to various approaches, the one thing that remains clear and transparent, and has not changed in its guidance is that the Fed’s move to begin raising rates is going to depend on the economy.

    Therefore, economic reports like this morning’s in the two areas the Fed says its most concerned about, employment and the housing industry, do not make the Fed’s task any easier to provide meaningful guidance

    New weekly unemployment claims fell by a big 36,000 last week to 280,000, much better than the consensus forecast of 305,000. But new housing starts plunged 14.4% in August to 956,000, much worse than the consensus forecast of 1.03 million, and permits for future starts declined 5.6%.

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    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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