Sunday, July 16, 2006

Reading the Crystal Ball

Market players have a tough time of it. Not only must they attempt to predict consumer taste and spending power, but they must also try to read the numbers and interpret the Fed's every word for the direction of interest rates.

The Fed's purported role is to control inflation, while at the same time insuring that the economy has wiggle room enough to avoid recession. But the Fed, as it portrays itself, is the equivalent of the tail wagging the dog.

tail wagging dog
[Thanks to loreenleedy.com for the image.]

The Fed can only act upon its own interpretation of statistics. The statistics in question are all after the fact -- the definition of statistics being "numerical data." You can't have data unless you've had the acts that create them and the time to collect, record and publish them.

The Fed's purported role as stated is nonsensical. You cannot "control" anything (implying foreknowledge of the economy's reaction to manipulated events) (1) using tools that are several weeks if not months old, and (2) manipulating events that are only a few of the many that affect an economy.

Read about Bernanke's quandary next Wednesday. The CPI statistics come out that morning, and he is speaking to Congress that afternoon. Marketwatch story.

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