Fed-Watchers Have Blinders On

One question in the most recent Blue Chip Financial Forecasts survey caught my eye: "Are you now More or Less certain that real GDP will be growing at or above its trend rate by the end of this year?"

Seeking the opinion of economists (or other classes of "experts") is a commonplace of contemporary public discourse, but inquiring whether they have any confidence in their opinions, or indeed any basis for holding them, is quite unusual.

Even more exceptional was the response to Blue Chip's question: 94% of respondents counted themselves less certain! That's a skewed distribution, one that by contrarian instinct would tell us that the economy is going to start cooking in the second half of this year. (I should disclose here that my response puts me right there among the modest majority of my brother and sister respondents. It takes chutzpah, or a puckish sense of humor, to claim conviction these days.)

That may be why market commentary is fibrillating over the Fed. For every pertinent word uttered by key Fed officials, Wall Street's chattering class multiplies it many hundredfold. Ever since the end of the reliable 25 basis points-per-meeting hiking regimen of 2004 to 2006, market participants and other Fed observers have been wondering what happens next.

It should be clear that even Fed heads can't be confident about predicting their own behavior; while they may not have been entirely successful in communicating their own diffidence, they have offered an elegant bumper-sticker summary: data-dependent. The Fed's next move will be dictated by how the data come in, and, if the Fed's current reading of economic conditions is nearly accurate, that next move may not take place in the current year. "Stand pat" is the default option for now.

If 94% of a normally cocky class of individuals professes to be less certain of the outlook than is normally the case, there is good reason for it. The future may be unknowable, always, but there are times when we think we have a better handle on it than at other times. This isn't one of those times.

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Jim Griffin is economic consultant and portfolio adviser to ING Investment Management and its Hartford-based unit, ING Aeltus, which manages institutional investment accounts and acts as adviser to the ING Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.