Does the Fed Have a Credibility Problem?

Credibility is a funny thing.

It takes a long time to develop, but it’s lost fairly quickly.

Credibility is a word that refers to the believability of a source or message.

And there are two components of credibility: Trustworthiness and expertise.

For example, in the world of journalism, professional integrity is the cornerstone of a journalist’s credibility.

And in science, a person’s credibility is measured and recognized for the extent that his work adheres to scientific principles.

But what about the credibility of the Federal Reserve?

Are the things the Fed has been saying credible?

Do they show trustworthiness and expertise?

Take, for example, San Francisco Federal Reserve President John Williams’ recent statements.

In January, as the market began to accelerate downwards, the Fed explained why it was “not too concerned” about China’s collapse:

“We’ve built in a weakening path for China. I don’t see that as a significant risk to the forecast” for the U.S. economy, China doesn’t affect the US market that much at all.”

And then, less than three months later, Mr. Williams said:

“We have a domestic mandate . . . but that said, we understand that we’re in a global economy so what happens in Brazil or China has a huge impact on the U.S. in terms of our inflation and employment goals.”

Think back to the two key components of credibility: Trustworthiness and expertise.

How is it that the Fed “wasn’t concerned” about China’s economic collapse, and then suddenly, its impact is “huge”?

For many years, the Fed has argued that it is being guided by data – by U.S. data – but their recent decision simply does not agree with the data.

Unemployment is at 4.9%. Inflation is rising – the year-over-year “core” CPI recently reported came in at 2.3%.

More importantly, in the three months since the Fed’s December meeting, both of these measures have further strengthened.

Clint Siegner, a Director at Money Metals Exchange, has a very strong view of the Fed’s lack of credibility:

“Fed officials jawbone the markets and spread disinformation. They figure it’s part of their job as central planners. It’s not enough to pull the levers and twist the knobs on interest rates, the money supply, and asset prices. They also use propaganda to manage investor psychology. It’s all smoke and mirrors.”

Smoke and mirrors!

Interestingly, on Tuesday, March 29th, Janet Yellen came out, laying on the dovishness again.

She said: “I consider it appropriate for the committee to proceed cautiously in adjusting policy . . . Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower.”

I believe this decision may be part of a “currency war” strategy, where a central bank takes action to weaken their currencies in a bid to gain an advantage against their global trading counterparts.

So, my long-term outlook on dollar strength is still in place, and we are being provided much better entry levels.

However, it also makes sense to trade the short-term sentiment if you are a short-term trader.

But be ready for the dollar strength to come back, especially if we see good Employment data this Friday.

Until next time,

Dustin

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