Quite a few years ago, I had the privilege to hear Malcom Gladwell, author of The Tipping Point and Blink, speak about the ramifications of expert failure. His point was simple: If an idiot makes a mistake, it doesn’t matter very much because logically, no one is listening to the idiot. However, if an expert makes an error, the ramifications can be enormous. When we want advice about the things that matter most to us, we almost invariably look for an expert. An expert has the knowledge and experience to make sound decisions and meaningful advice. However, it is the overconfidence of experts that often leads to downfalls and the consequences of their actions can have unusually strong impacts. The Federal Reserve Board is one such group of experts.
Being a Federal Reserve Board member is much like being a cop; long periods of boredom, interrupted by short periods of sheer terror. We are smack in the middle of one of those terrifying periods. The Fed is often referred to as being ‘data dependent’, as if the data somehow dictates their actions without any individual input, but we know better. We rely on these learned men and women to make sound judgments about the economy and monetary policy to keep the USA on the path to prosperity.
But the data is not always clear cut and that makes it very difficult to alter monetary policy in one direction or another based solely on the data. That’s when the Fed must rely on its collective training and experience to make decisions. The dilemma the Fed faces is at what point, if any, do they downplay the data and trust their experience and expertise?
While most other indicators were pointing toward a recession, the labor market has remained stubbornly strong and the Fed chose to focus on the labor data. As a consequence, interest rates would need to be raised until the employment shortage, and the related inflationary wage pressure, subsided. Then, this week, the data changed because that continuing flow of economic data is subject to revision. Now it appears that the labor data was not very accurate in the first place and the Fed may have made an error in raising interest rates so far, so fast. This would be another example of expert failure and one where the costs could be very high.
When we look at the chart below, the first word that springs to mind is: Whoops! While the Fed was watching jobless claims trend down (green line), implying a strong economy, the revised jobless trend (red line) has actually been moving up since last October. And of course, the Fed’s continued aggressiveness in raising rates since October has not only contributed to the banking turmoil over the last several weeks, it has added pressure on an already weakening economy.
Jobless claims are far from new highs, but now the trend appears to be very different than implied by the original data. This raises the risk that the Fed has pushed too hard to slow the economy down, and the risk of recession is heightened. The evidence of that is that this week, for the first time in a long time, bad news for the economy was bad news for markets too. For quite some time, markets would reflexively move higher on bad economic news in anticipation of interest rate cuts. The difference today is that we are staring a recession in the face and that makes bad news, bad news.
What We’re Reading
How to Want Less
March Jobs Report Shows Hiring Gradually Cooling
Job openings tumbled below 10 mill. in Feb. for the first time in nearly two years
Private payrolls rose by 145,000 in March, well below expectations, ADP saysFederal Reserve, Interest Rates, Jobs, Recession, Unemployment, Unemployment claims