The Fed’s Monetary Animal Farm—–Let Us Make Your Decisions, Comrades

I am more convinced than ever that the FOMC is simply trying to scare a recovery into existence. The June update to the Fed’s models for central economic tendencies were, in a word, atrocious. The economy was marked down in almost every facet, and not by a little. The upper boundary on the central tendency for GDP was dropped by 0.7%, all the way to just 2% from 2.7% at the March update. That means, given the current thinking which somehow includes an economy strong enough to consider ending ZIRP (from an orthodox perspective), this year is going to be worse than last year.

Somehow out of all that word salad statement, we are to assume that the Fed is even more convinced that the economy has only gotten better if only because it got worse?

Rational expectations is a fickle master, creating all sorts of nonsense and circular logic that passes for coherent association and discipline. It’s no longer the first quarter and potential “seasonal” problems with the data, the FOMC and its academic arm just acknowledged that the “slump” has gained so far as to engulf at least the entire first half of 2015; a time period that was never supposed to be even in question given all the protestations that came out of last year (5% GDP and all that).

From December:

The solid growth could clear the path for the Federal Reserve to increase interest rates in 2015. While there is some trepidation about the first interest rate hike in nearly a decade, it would signal that the U.S. economy in [SIC] actually strong enough to take off the training wheels.

I think that is the entire point, right down to the rational expectations root. The Fed is going to raise rates (or, in actuality, make you think

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