This document summarizes Steven Avary's perspective on whether the Federal Reserve should raise interest rates at its upcoming meeting on December 14, 2016. Avary argues that the data is mixed and does not clearly support an interest rate hike to mitigate perceived inflationary pressures. He believes a rate increase would be driven more by a desire for political control rather than being truly data-dependent. Avary proposes differentiating between demand-pull and cost-push inflation, replacing the U-3 unemployment metric with the broader U-6, and limiting the Fed's use of open market operations and interest rate changes.

1. THE DOT MATRIX AND
THE DUALITY DILEMMA
By Steven L. Avary
December 11, 2016

2. Steven Avary
The Dot Matrix and the Duality Dilemma
1
INTRODUCTION
On December 14th
, 2016, the Fed will decide whether to increase interest rates. At the time of this
writing, the probability of a Fed rate hike is 94.9%.1
The question is whether the Fed should raise
rates? My perspective is as an adherent of the tenets of Neoliberal (Neo) Economics (e.g., the
superiority of markets, fiscal discipline, and limited government). As such, I am offering you “the
Red Pill,” that allows you to see things as they truly are, rather than the suspect data that is “pulled
over your eyes to blind you from the truth.”2
The Fed has frequently mentioned that any moves with regards to monetary policy will be “data
dependent.” Bond traders state that the “dot plot seems to contradict the central bank’s most
consistent claim on what drives the formulation of monetary policy – namely ‘data dependence’.”3
Further, the FOMC claims that their focus on rate movements is on core inflation, stripping away
the more volatile food and energy sectors. Historically, these claims have limited empirical support,
as I describe in my thesis at NYU.4
Still, the Fed has moved even when risks are balanced.5 6 7 8 9
If there was strict adherence to their claim, I make the argument that the incoming data is mixed,
insufficient to claim a rate hike at the meeting is needed to mitigate perceived inflationary pressures.
As such, I believe if a rate increase takes place, the driving force is “political in nature” (i.e., control)
rather than supported by the data. I make the same claim in my prior LinkedIn post “Sigma Freud.”10
My claim is buttressed in the latest FOMC minutes in which risk is described as “roughly
balanced,”11
yet they argued that “to preserve credibility, such an increase should occur at the next
meeting.”12
Credibility is earned when making the correct decision, and adhering to articulated rules
(i.e., data dependent).
To be certain, the economy is still soft. Even with the upward revision of Q3 GDP estimates to
3.2%, a single point estimate does not a trend make. In normal times, the Q3 GDP estimate would
be considered roughly par over the long-term; however, with such tepid results over the last several
1 CME Group. Countdown to the FOMC. FedWatch Tool. Web. December 11, 2016.
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
2 The Matrix. Directed by the Wachowski Brothers. Warner Bros., 1999.
3 Kawa, Luke. Economist: The Fed Should Kill the Dot Plot – The dot has never been on the dot. Bloomberg. March 21, 2016.
(https://www.bloomberg.com/news/articles/2016-03-21/economist-the-fed-should-kill-the-dot-plot).
4 Avary, Steven. The Big BOP-PER: An Analysis of America’s Balance of Payments and Strategy for Political and Economic
Realignment. p. 42. December 2014. (http://www.linkedin.com/in/stevenavary).
5 The Federal Reserve Board. "Minutes of the Federal Open Market Committee: August 10, 2004." Web. November 14,
2014. (http://www.federalreserve.gov/fomc/minutes/20040810.htm).
6 The Federal Reserve Board. "Minutes of the Federal Open Market Committee: May 3, 2005." Web. November 14, 2014.
(http://www.federalreserve.gov/fomc/minutes/20050503.htm).
7 The Federal Reserve Board. "Minutes of the Federal Open Market Committee: August 9, 2005." Web. November 14,
2014. (http://www.federalreserve.gov/fomc/minutes/20050809.htm).
8 The Federal Reserve Board. "Minutes of the Federal Open Market Committee: September 20, 2005." Web. November
14, 2014. (http://www.federalreserve.gov/fomc/minutes/20050920.htm).
9 The Federal Reserve Board. "Minutes of the Federal Open Market Committee: December 13, 2005." Web. November
14, 2014. (http://www.federalreserve.gov/fomc/minutes/20051213.htm).
10 Avary, Steven. Sigma Freud. December 15, 2015. (https://www.linkedin.com/pulse/sigma-freud-steven-avary?trk=mp-
reader-card).
11 The Federal Reserve Board. Minutes of the Federal Open Market Committee: November 2, 2016.” Web. November
2, 2016 (https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20161102.pdf).
12 Ibid

3. Steven Avary
The Dot Matrix and the Duality Dilemma
2
years, many economists lowered the bar for expectations as if we should be content with the “new
normal”13 14
of underperformance. Given the long and deep recession, a strong argument could be
made that GDP should exceed a “3 handle,” with the capability of achieving 4%+ over the
intermediate term if the right policies are in place. Even if capital and labor constrained, I believe
the greater incentive effect with the incoming administration will energize TFP. As of December
9th
, the GDPNow™ forecast provided by the Atlanta Fed projects Q4 GDP of 2.6%,15
while the
consensus GDP estimates from the Wall Street Journal’s Economic Survey is 2.4% for 2017 and
2018.16
The Fed Data Matrix speaks of the “sizzle” associated with expectations for a more robust
economy as justification for raising rates; however, these assertions contradict its own more modest
projections. If past is prologue, rather than receiving the promised “tasty steak,” a more likely
situation would be to be served up a bowl of “tastee wheat.”17
While the Q3 figure is an improvement, it is still subject to revision, sometimes materially as
identified by Chriss Street.18
Therefore, the data should be viewed in collaboration with other
indicators. For example, when reviewing the most recent release of the Leading (LEI), Coincident
(CEI), and Lagging (LAG) Economic Indicators,19
suggest that there is still much room for
improvement for the economy, especially within the context of whether the economy has truly
achieved escape velocity and has sustainable growth without the Fed’s artificial stimulus. The
modest diffusion index piqued my curiosity; thus, I did an analysis on the LEI, stripping out three
components (i.e., the spread between the 10-Year Treasury and Fed Funds, the Leading Credit
Index™, and return on the S&P 500™) that are more directly affected by Fed policy. Of the 10
items comprising the LEI, their ranked absolute changes over this time series were 1st, 3rd, and 4th,
13 Smialek, Jeanna. America’s New Normal Will Look Pretty Slow, Fed Economist Says. Bloomberg. October 11, 2016.
(https://www.bloomberg.com/news/articles/2016-10-11/america-s-new-normal-will-look-pretty-slow-fed-economist-
says).
14
Note: Fernald taught my Macroeconomics class while a visiting professor at Chicago Booth. The feedback I received
on an assignment where I highlight the Fed’s misunderstanding of energy cost-push inflation was, “A Fresh View!”
15 The Federal Reserve Bank of Atlanta. Center for Quantitative Economic Research. GDPNow™. December 9, 2016.
Web. December 10, 2016. (https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1).
16 The Wall Street Journal. Economic Forecasting Survey. Web. December 10, 2016.
(http://projects.wsj.com/econforecast/#ind=gdp&r=20).
17
The Matrix.
18 Street, Chriss. Obama Administration To Revise Total GDP Growth Down 2%. Breitbart.com. June 16, 2016.
(http://www.breitbart.com/big-government/2016/06/16/obama-administration-massively-revise-gdp-downward/).
19 The Conference Board. The Conference Board Leading Economic Index® (LEI) for the United States and Related Composite
Economic Indexes for October 2016. November 18, 2016 (https://www.conference-
board.org/pdf_free/press/US%20LEI%20-%20Tech%20Notes%20Nov%2018%202016.pdf).
Longer Longer
Release 2016 2017 2018 Run 2016 2017 2018 Run
Dec '15 2.4 2.2 2.0 2.0 2.0 - 2.7 1.8 - 2.5 1.7 - 2.4 1.8 - 2.3
Mar '16 2.2 2.1 2.0 2.0 1.9 - 2.5 1.7 - 2.3 1.8 - 2.3 1.8 - 2.4
Jun '16 2.0 2.0 2.0 2.0 1.8 - 2.2 1.6 - 2.4 1.5 - 2.2 1.6 - 2.4
Sep '16 1.8 2.0 2.0 1.8 1.7 - 2.0 1.6 - 2.5 1.5 - 2.3 1.6 - 2.2
Median Range
Real GDP Pct. Change Projections

4. Steven Avary
The Dot Matrix and the Duality Dilemma
3
respectively. This adjusted LEI (ALEI) has been flat or negative three out of the six months over
the time series presented, including the latest period in October, as visualized in the following graph.
Note: Verizon worker
strike beginning in May
that lasted
approximately six
weeks distorts the data
over that time series.
Our economy is highly levered. Leverage is a dual-edged sword. As such, it might be better to run
“slightly hot,” allowing issuers to pay back debt with cheaper nominal dollars, rather than leaving the
economy susceptible to the leverage multiplier effect should economic growth deteriorate; therefore,
it is imperative that the Fed get the timing, amount, and direction correct.
Labor supply pressures should abate as more job seekers re-enter the workforce with the improved
economy. Also, I believe that while many Baby Boomers have hung up their spurs for good, there
will still be plenty of others like Peyton on Sunday morning -- someone itching for something to do
with still a lot to offer, albeit it might not be full-time. Ceteris paribus, such an outcome would push
up U-3. With the improved economic outlook, corporations will most likely shift cash flows away
from financial engineering and towards greater CapEx, expanding capital asset capacity, and the
impetus for growth in the real economy.
Additionally, there is significant Vox Populi risk,20
particularly surrounding recent elections, voter
referendums, and impeachments, both domestically and internationally, with the potential for
creating social unrest. Such regime changes insert greater uncertainty into the system, and in
response, risk premia for capital investments tend to expand. Also, the recent oil field find in the
American Permian Basin, which is described as potentially rivaling Saudi’s prolific Ghawar Field,21
changes the dynamic which provides America substantially more leverage in geopolitical and
economic arenas.
20 Kawa, Luke. Citigroup: There’s a whole new type of political risk to worry about. Bloomberg.com. January 19, 2016.
(https://www.bloomberg.com/news/articles/2016-01-19/citigroup-there-s-a-whole-new-type-of-political-risk-to-worry-
about).
21 Carroll, Joe. Permian’s Wolfcamp formation called biggest shale oil field in U.S. Bloomberg News. November 15, 2016.
(http://www.star-telegram.com/news/business/article114931993.html)
40
45
50
55
60
65
70
75
80
85
90
-0.35
-0.25
-0.15
-0.05
0.05
0.15
0.25
0.35
0.45
0.55
May'16
Jun'16
Jul'16
Aug'16
Sep'16
Oct'16
DiffusionIndex
PercentageChange
Economic Indicators
(Source: The Conference Board)
LEI ALEI CEI LAG LEI Diffusion

5. Steven Avary
The Dot Matrix and the Duality Dilemma
4
IDEATION ILLUMINATION
Critical to the assessment of FOMC decision making is cognizance of the members’ formal training,
experiences, and ideology. When reviewing the current members of the FOMC, there are some
issues that stand out:
1. Many do not have formal training in finance or economics.
2. Few have experience in the private sector, especially with managing a P&L.
3. It is populated largely with Keynesians.
Why do these factors matter?
1. FOMC members not formally trained are reliant on others’ biased interpretations.
2. Few have a “skin in the game” mindset. To a large extent, they have job security in their
roles. With respect to the Board of Governors members, a full-term is for 14 years, which
provides them a tenure-like security. Should there be a major policy misstep, they can just
“go back to the drawing board.” A banker that has a significant deal blow up, a trader that
takes a position that takes a dive, or a strategist that publishes a report for public
consumption on where to allocate assets only to see the market move away from their
recommendation, are at risk of joining the unemployment line.
3. Central to Keynesian Economics’ mindset is interventionism. Taking such actions bypasses
the natural healing process of market dynamics, particularly that of price discovery. While
there might be a time lag with the market, it leads to a better resource allocation to
determine the natural equilibrium. One of the best examples of flaws with misallocation of
resources and the incentive effect in Keynesian Orthodoxy is the prognostications of Paul
Samuelson. Samuelson claimed that the Soviet Union’s (centrally planned) economy would
surpass that of America’s, and provided a date certain. When that date passed, and the
prediction did not materialize, he changed the date ... frequently. Eventually, the Soviet
Union and Samuelson expired, with his prognostication unfulfilled.
Daniel Tarullo is a prominent example of the aforementioned factors of the current FOMC
members. Basel regulatory standard mandates banks to increase their capital bases to provide more
cushion in the event of an economic downturn. Yet, Tarullo has suggested that the largest banks
should have a surcharge22
which would deplete the additional capital raised required by Basel. Such
a position is ludicrous. First, it is antithetical to a market economy. It is imperative for a financial
institution to continue to seek scale and scope economies, becoming more efficient and allocate
assets to their most productive use. A company should not be punished for excelling; rather it
should be recognized and exemplified for the superiority of markets. Second, anti-trust laws already
exist to keep dominant entities in check. Adoption of such a policy would act like an anaconda,
constricting all within its purview.
22 Tarullo, Daniel, K. Opening Statement by Governor Daniel K. Tarullo. Board of Governors of the Federal Reserve System.
December 9, 2014. (https://www.federalreserve.gov/newsevents/press/bcreg/tarullo-statement-20141209.htm).

6. Steven Avary
The Dot Matrix and the Duality Dilemma
5
CENTRALIZED SYSTEM
Utilizing monetary policy tools, the Fed has significant control over the pricing, allocation, and
amount of money. Implementing monetary policy through the Fed Funds rate allows one-sided
pricing (i.e., Monopoly power). This central control bypasses the more robust market mechanism of
price discovery (i.e., bid/ask) that incorporates the “Wisdom of Crowds” which tends to result in
greater accuracy of true value. Open Market Operations (OMO), including QE, allocates capital to
government, facilitating its growth.
Solution Proposal
I propose the following:
 Differentiate between Demand-Pull (DP) and Cost-Push (CP) inflation
 Replace the headline U-3 unemployment metric with the broader U-6
 Limit OMO and interest rate changes
Inflation Differentiation
Inflation may be described similar to “an elevated heart rate,” which may be due to increased activity
(i.e., Demand-Pull), analogous to good (HDL) cholesterol, but may need to be moderated so as not
to overheat; whereas, Cost-Push is detrimental (LDL) cholesterol. Oftentimes, CP is a result of
government mandates (e.g., Obamacare, minimum wage laws). Other times it can show up as a
supply shock (e.g., oil). CP axioms include:
 There will be a price point that eventually results in demand destruction.
 Additional production will be brought online (i.e., new supply); therefore, bringing the price
back into its long-term equilibrium.
 Substitute sources will displace, with an increase in aggregate supply.
The importance of differentiating between the two types of inflation when implementing monetary
policy is that with DP, generally a company has some pricing power; whereas, CP means that higher
prices will bleed through and erode a company’s margins. So, if the Fed raises rates, it “counters” an
increase in input cost (e.g., energy) with an increase in another input cost (i.e., capital), which
instigates negative feedback loops and slowing the aggregate economy too much.23
Non-intervention
with CP would be a more prudent policy allowing the market the opportunity to correct itself.
23 Avary, Steven. The Big BOP-PER. p. 44
D AD AS' AD' AS
P1 S
D'
P* P* P' AS P'
S' AD
P1 P* P*
Q1 Q* Q* Q1 Y' Y* Y* Y'
Cost-Push Inflation Demand-Pull InflationDemand Destruction New Supply

7. Steven Avary
The Dot Matrix and the Duality Dilemma
6
Unemployment Metric Replacement
Probably the most frequently cited reason for moving up rates in the current environment is the
headline (U-3) unemployment figure. This figure has trended down to a level many describe as “full
employment”; however, due to the way it is calculated, this metric can be highly misleading. Indeed,
much of the improvement is due to the number of people dropping out of the labor force. As such,
U-3 is like the anomalous “the woman in the red dress,”24
distracting Neo from other “economic
agents” around him that pose significant risk. Deeper analysis of the unemployment data is
warranted as U-3 has limited discernment to assess qualitative aspects. U-3 does not address
underutilized and misallocated labor assets. For a better analogy, U-3 is the claim that a country is
just as well off with Usain Bolt working at the Ministry of Silly Walks.25
Therefore, U-6, the broadest
measure of unemployment, is least susceptible to distortion and most appropriate.
OMO and Interest Rate Changes
With Open Market Operations, the Fed purchases treasury and agency mortgage debt. In so doing
it is allocating capital to those issuers. As such, these actions facilitate growth in government and
demand for real estate assets. With respect to government growth, it is paid through taxes on the
private sector or additional borrowing (i.e., future taxes), which crowds out capital from the private
sector needed for economic growth. As the government is not as effective and efficient with capital
relative to the private sector in general, aggregate demand declines and leads to wealth destruction.26
To the extent that the Fed buys a greater proportion of treasury securities relative to other
purchasers inures to the benefit of the U.S. Treasury, underprices treasury debt, and further enables
growth in government. Residual income from the Fed’s treasury holdings is remitted back to the
Treasury, with the Treasury collecting almost $100 billion from the Fed over the last two years,
approximately 3x the average in the three years prior to the 2008 financial crisis; 27
thus, the potential
to compromise the Fed’s independence and contribute to promoting a political agenda. Reducing
the Fed’s treasury bond exposure by not reinvesting maturing principal and interest from its
portfolio would be a more prudent way of raising rates without a direct rate hike. Additionally,
eliminating the mortgage bond purchases should help moderate escalating real estate prices.
24 The Matrix
25 Dinsdale!. Monty Python’s Flying Circus. September 15, 1970 (https://www.youtube.com/watch?v=IqhlQfXUk7w).
26
Ader, David. The Federal Deficit Is Set to Explode: Increases in the annual budget gap add to the national debt and blunt prospects for
economic growth. Barron’s. September 3, 2016.
27 Fairless, Tom. Windfall for Central Banks Fuels Political Pressure. The Wall Street Journal. May 8, 2016.
(http://wsj.com/articles/windfall-for-central-banks-fuels-political-pressure-1462726275).

8. Steven Avary
The Dot Matrix and the Duality Dilemma
7
DATA DEPENDENCE
As aforementioned, some of the data is suspect. Indeed, Justin Lahart of The Wall Street Journal
suggested a major disconnect between jobs added relative to GDP figures based on an analysis using
a linear regression model.28
In the jobs report, Q1 2016 had a YOY increase of 2.8 million. Relative
to that periods’ GDP figures and based on Lahart’s model, there should have been a 3.4% increase
in GDP, or conversely 1.2 million jobs added. In other words, less than half the figure reported.
Employment
Much of the hiring recently has been part-time, likely due to seasonal hiring for the holidays. It is
also my belief that the large increase in part-time hiring is at the expense of full-time employment as
employers tried to avoid the trigger for Obamacare healthcare requirements. The dip in the U-3 rate
is largely attributable to the reduction in the Participation Rate. The modest to decreased Average
Hourly Earnings and softening of the Average Work Week, imply additional slack in labor assets,
limiting inflationary pressures.
Notes:
July’s figures
include Verizon
workers
returning after
strike.
November’s
figures include
14K additions
for temporary
help.
Notes:
Continued
improvement in
claims. Partially
attributable to
holiday hiring and
general firming in
the overall
economy.
28 Lahart, Justin. Jobs report is hard work for the Fed – Pace of hiring, pace of economic growth disconnect. The Wall Street Journal.
May 7-8, 2016.
Employment Metric Jul Aug Sep Oct Nov
U-3 4.9 4.9 5.0 4.9 4.6
U-6 9.7 9.7 9.7 9.5 9.3
Non-Farm Payroll Additions (000's) 275 167 191 142 178
Participation Rate 62.8 62.8 62.9 62.8 62.7
Avg. Hourly Earn. (% Chg. MOM) 0.3 0.1 0.3 0.4 -0.1
Avg. Work Week (Hours) 34.4 34.3 34.4 34.4 34.0
Percentages except where noted
210,000
220,000
230,000
240,000
250,000
260,000
270,000
280,000
290,000
1,850,000
1,900,000
1,950,000
2,000,000
2,050,000
2,100,000
2,150,000
2,200,000
6/4/2016
6/18/2016
7/2/2016
7/16/2016
7/30/2016
8/13/2016
8/27/2016
9/10/2016
9/24/2016
10/8/2016
10/22/2016
11/5/2016
11/19/2016
12/3/2016
NewClaims
Continuing&MovingAvg.
Axis Title
Unemployment Insurance Claims
(SAAR)
Continuing Claims 4-Week Mvg. Avg. New Claims

9. Steven Avary
The Dot Matrix and the Duality Dilemma
8
Inflation
The Producer Price Index (PPI), the Personal Consumption Expenditure Price Index (PCE), and
the Consumer Price Index (CPI), have been modest, and the Fed’s preferred measure, Core PCE, is
below the 2% target level. Further, the components of the indices that show some inflationary
pressures would not be considered diffuse. Rather, they are concentrated in a few areas, such as
health care costs, which is due largely to CP inflation (i.e., Obamacare). However, I believe with the
new administration, there will be some changes to existing health care laws that will bring in more
competition and drive down costs. Minimum wage rates are also often used in collective bargaining
agreements as part of its compensation formula, yet gains made by Right to Work activities
continues to deplete union membership. Some of the escalation in real estate prices are driven by
the Fed’s OMO purchases, and purchases that involve money laundering. To address this issue, a
law29
was passed to identify the end buyers. This act should help contain prices, especially within the
ultraluxury segment, with the potential of a domino effect on lower-tier real estate. Additionally,
capacity utilization of 75.3%30
suggests modest inflationary pressures on capital assets.
Sources: United States Department of Labor, Bureau of Labor
Statistics. Bureau of Economic Analysis, U.S. Department of
Commerce.
Oct Color (% annualized)
CPI:31
Medical Care
- Commodities + 5
- Services + 4.1
Shelter + 3.5
Motor Vehicle Ins. +6.7
PCE:32
Healthcare + 2.3
Housing & Utilities + 3
PPI:33
Trade of Capital Equipment
- Private + 5.2
- Government + 6.8
29 United States Department of the Treasury. FinCEN Expands Reach of Real Estate “Geographic Targeting Orders”
Beyond Manhattan and Miami. July 27, 2016.
(https://www.fincen.gov/news/news-releases/fincen-expands-reach-real-estate-geographic-targeting-orders-beyond-
manhattan).
30
The Federal Reserve Bank of St. Louis. Federal Reserve Economic Data (FRED)
(https://fred.stlouisfed.org/series/TCU). Web. December 11, 2016
31
Bureau of Labor Statistics. United States Department of Labor. Consumer Price Index for All Urban Consumers
(CPI-U): U.S. city average, by expenditure category, October 2016. Web. December 10, 2016.
(http://www.bls.gov/news.release/cpi.t01.htm).
32
Bureau of Economic Analysis. U.S. Department of Commerce. Table 2.3.1. Percent Change From Preceding Period in
Real Personal Consumption Expenditures by Major Type of Product. Web. December 10, 2016.
(http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=61).
33
Bureau of Labor Statistics. United States Department of Labor. Producer price indexes and percent changes for final
demand. Web. December 10, 2016. (http://www.bls.gov/news.release/ppi.t01.htm).
Inflation Index Jun Jul Aug Sep Oct
CPI:
Headline 1.0 0.8 1.1 1.5 1.6
Core 2.3 2.2 2.3 2.2 2.1
PCE:
Headline 0.9 0.8 1.0 1.2 1.4
Core 1.6 1.6 1.7 1.7 1.7
PPI:
Headline 0.3 -0.2 0.0 0.7 0.8
Core 0.9 0.8 1.2 1.5 1.6
Percentage YOY Inflation Rate

10. Steven Avary
The Dot Matrix and the Duality Dilemma
9
THE DUALITY DILEMMA
The FOMC’s dual mandate of maximum employment and price stability could be described as
dichotomous, and that executing policy to keep these factors in balance is unattainable. Although
there are bands given from which to work, policy moves to constantly fine-tune the balance tends to
overshoot, forcing them to retrace their steps. Furthermore, as aforementioned, they often act even
when these factors are relatively balanced. As such, this intervention causes disequilibria and
distorts the markets. As I noted in my NYU thesis,34
there was a period of energy CP inflation
associated with government mandates (i.e., renewable fuel standards) and supply disruption (i.e.,
Hurricane Katrina) in the mid-2000’s. Rather than accommodate the market with cheaper capital to
fund the repair of damaged concomitant energy infrastructure, and bringing new supply online, there
was a series of rapid interest rate hikes, 17 hikes of 25 bps each. As such, various floating rate debt
instruments, especially related to the mortgage market, resulted in a dramatic increase in interest rate
payments. For example, with these rate moves, monthly mortgage payments increased
approximately $1.58 per $1,000 of principal outstanding.35
My greatest concern is the inability of the
Fed to discern the implications of CP versus DP inflation, with moves that restrain the nascent
recovery, perhaps even triggering another economic downturn.
THE DOT MATRIX
The Dot Plots, the graphical representation of the FOMC’s guidance on the Fed Fund’s rate, has
been highly criticized, and deservedly so. Derek Holt of Scotiabank states, “The exercise has been
marked by monumental forecast inaccuracy measured not in mere basis points on individual rates
moves but in orders of magnitude on full-cycle guidance, and guidance has not helped markets to
formulate views on near-to medium-term policy exercises.”36
As aforementioned, the FOMC is
heavily populated by Keynesians, and it is my belief a major contributing factor to the very wide of
the mark forecasts is due to this ideological makeup -- belief in interventionism, and the inability to
fully grasp the misallocation and incentive effects on the overall economy.
Median Fed Funds Pct. Rate Projections
Source: Federal Reserve Board
34 Avary, Steven. The Big BOP-PER, p. 43.
35 Ibid, p. 61
36
Kawa, Luke. Economist: The Fed Should Kill the Dot Plot – The dot has never been on the dot.
Longer
Release 2016 2017 2018 Run
Dec '15 1.4 2.4 3.3 3.5
Mar '16 0.9 1.9 3.0 3.3
Jun '16 0.9 1.6 2.4 NA
Sep '16 0.6 1.1 1.9 2.6