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Sept. 21, 2019, 4:27 p.m. EDT

In a time of Trump, the Fed doesn’t know what’s going to happen next

Powell declares forward guidance dead

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By Rex Nutting, MarketWatch

‘Don’t look at me for answers,’ Jerome Powell seems to say.

Fed Chair Jerome Powell doesn’t know the answer, he knows he doesn’t know, and he knows you know he doesn’t know. So quit asking it.

“It” of course is the trillion-dollar question (and its many permutations) that everyone on Wall Street, on Main Street, and in Washington is asking: What’s happening in the economy? Is a recession coming? Will the Fed cut rates in time? Should I buy or sell? Should I refinance? Should I expand my business? Will the trade war blow over?

And so when the Fed released its latest forecasts on Wednesday, everyone rushed to look at the dot plot to see if the Fed was going to cut rates again in December. The answer was no, and everybody got sad.

But that’s the wrong response, because as I said, Powell doesn’t know the answer.

Also read : Fed lowers interest rates, and many on panel foresee another cut this year

Forward guidance

For nearly two decades, the Federal Reserve has tried to be as predictable as possible, on the theory that the best way to conduct monetary policy is to give everybody a road map to where the Fed is likely heading. Forward guidance would let investors, traders, businesses and consumers set their expectations about monetary policy, and that would keep the economy humming along.

Except in emergencies, the Fed’s policy was to never surprise the markets. For much of the tepid expansion, the Fed’s message was: We promise to keep interest rates low for a very long time. They published a “dot plot” to illustrate that commitment to keep rates low.

And then, once they began tightening, their message was: We will raise rates very gradually. And the dot plot helped them communicate that.

But once the Fed started to ease rates again, the strategy of forward guidance became a liability to the Fed. The dot plot now does more harm than good.

Put no stock in our forecasts

On Wednesday, Powell all but declared forward guidance dead.

Don’t pay any attention to our forecasts, he seemed to be saying, because we really don’t know what will happen next. We have no faith in our forecasts, and neither should you.

You can’t give meaningful forward guidance if you do not know which way you are going to turn. Powell promised the Fed would remain vigilant and would try to steer the economy out of trouble, but he couldn’t say whether trouble would come, or when.

Read: Stock market’s eerie parallels to September 2007 should raise recession fears

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