Understanding the Fed: When in Doubt Say the Opposite
When reading or hearing comments, how do you judge whether what they're saying has any merit? For example, if Bernanke says that the Fed's quantitative easing policy is working, how do you know whether what he says is true?
Sometimes what Fed or government officials say - or what is reported in the media - makes sense. You might find some valuable information there. (Otherwise, why would you be reading it in the first place?)
On the other hand you and I both know that a lot of what comes out of the mouths of officials is either propaganda intended to soothe us little people or pure nonsense.
So I use the following technique to test the usefulness or veracity of their statements
Here's what I do: I say the opposite. If I can picture the person saying the opposite, then I can give some credence to what he or she is saying. If not, then what they say really isn't meaningful and I either ignore it or consider it's opposite something I should be concerned about.
Let's use an example to see how this works. We'll use recent comments by Bill Dudley, head of the the New York Fed, as reported in the Wall Street Journal on February 28th. He's talking about the economy, commodity prices and the Fed's quantitative easing policy. I'll quote Dudley first, then state the opposite of what he said, then I'll comment and provide what I think we can take away from the statement, i.e., what value it might have in helping to improve our understanding of the issue at hand.
Dudley: "The economic outlook has improved considerably."
Opposite: "The economic outlook has not improved."
Comment: I can picture Dudley saying the opposite. It wouldn't surprise or shock me. So his positive comment makes sense. Whether it's true or not is another matter.
Take away: If evidence is presented (and he does present some evidence) that the economy is improving and we either see that the evidence is accurate or we simply believe the evidence as he presents it, then we come away with an improved understanding of the state of the economy. This could help us in our decision-making as it applies to our investments, our work, or any other aspect of our lives that is impacted by the economy.
Later on, though, Dudley says this:
Dudley: "I am...confident that no one on the FOMC (Fed Open Market Committee - ed.) is willing to countenance a sustained rise in either inflation expectations or inflation."
Opposite: "I am confident that there are people on the FOMC who are willing to encourage a sustained rise in either inflation expectations or inflation."
Comment: Can you imagine Dudley saying the opposite here? I can't. So what do we do now?
Take away: First, we discount, even better ignore, Dudley's statement. We could dismiss it totally and put it out of our minds. Many of these sorts of comments that essentially say nothing of any credible nature are best ignored and/or forgotten. However, we may, in certain circumstances, ask why he might have said something so obviously meaningless? Could it be that the Fed is concerned about inflation, or concerned that Americans are feeling like inflation is coming? Either one of these could trigger a bout of high inflation if a) prices rise on their own or b) people believe prices are going to rise and therefore run out to buy items, thereby driving up their prices and causing, by those actions, price inflation. If either of these are operative, we would want to be vigilant about inflation, and perhaps might decide to take some action or actions to prepare and protect ourselves from inflation.
The point is that if you're going to read this kind of stuff, you need to be discriminating in determining whether what you're reading has any value. Otherwise, you're just reading a lot of hot air or, worse, propaganda meant to manipulate you.
In any case, I find the exercise of saying the opposite helpful, especially when it comes to statements by officials of the Fed or the government.
If interested, you can read Dudley's entire speech by clicking here or you can read the Wall Street Journal article by clicking here.
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Sometimes what Fed or government officials say - or what is reported in the media - makes sense. You might find some valuable information there. (Otherwise, why would you be reading it in the first place?)
On the other hand you and I both know that a lot of what comes out of the mouths of officials is either propaganda intended to soothe us little people or pure nonsense.
So I use the following technique to test the usefulness or veracity of their statements
Here's what I do: I say the opposite. If I can picture the person saying the opposite, then I can give some credence to what he or she is saying. If not, then what they say really isn't meaningful and I either ignore it or consider it's opposite something I should be concerned about.
Let's use an example to see how this works. We'll use recent comments by Bill Dudley, head of the the New York Fed, as reported in the Wall Street Journal on February 28th. He's talking about the economy, commodity prices and the Fed's quantitative easing policy. I'll quote Dudley first, then state the opposite of what he said, then I'll comment and provide what I think we can take away from the statement, i.e., what value it might have in helping to improve our understanding of the issue at hand.
Dudley: "The economic outlook has improved considerably."
Opposite: "The economic outlook has not improved."
Comment: I can picture Dudley saying the opposite. It wouldn't surprise or shock me. So his positive comment makes sense. Whether it's true or not is another matter.
Take away: If evidence is presented (and he does present some evidence) that the economy is improving and we either see that the evidence is accurate or we simply believe the evidence as he presents it, then we come away with an improved understanding of the state of the economy. This could help us in our decision-making as it applies to our investments, our work, or any other aspect of our lives that is impacted by the economy.
Later on, though, Dudley says this:
Dudley: "I am...confident that no one on the FOMC (Fed Open Market Committee - ed.) is willing to countenance a sustained rise in either inflation expectations or inflation."
Opposite: "I am confident that there are people on the FOMC who are willing to encourage a sustained rise in either inflation expectations or inflation."
Comment: Can you imagine Dudley saying the opposite here? I can't. So what do we do now?
Take away: First, we discount, even better ignore, Dudley's statement. We could dismiss it totally and put it out of our minds. Many of these sorts of comments that essentially say nothing of any credible nature are best ignored and/or forgotten. However, we may, in certain circumstances, ask why he might have said something so obviously meaningless? Could it be that the Fed is concerned about inflation, or concerned that Americans are feeling like inflation is coming? Either one of these could trigger a bout of high inflation if a) prices rise on their own or b) people believe prices are going to rise and therefore run out to buy items, thereby driving up their prices and causing, by those actions, price inflation. If either of these are operative, we would want to be vigilant about inflation, and perhaps might decide to take some action or actions to prepare and protect ourselves from inflation.
The point is that if you're going to read this kind of stuff, you need to be discriminating in determining whether what you're reading has any value. Otherwise, you're just reading a lot of hot air or, worse, propaganda meant to manipulate you.
In any case, I find the exercise of saying the opposite helpful, especially when it comes to statements by officials of the Fed or the government.
If interested, you can read Dudley's entire speech by clicking here or you can read the Wall Street Journal article by clicking here.
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