Back Economics

Wilcox has a great piece, by which I mean I agree with it

Published on January 24, 2024

Gerard MacDonell

The former head of the Fed’s forecasting effort, David Wilcox, has written a compelling piece for the Peterson Institute that is meant to be about best practice monetary policy but may also have an important implication for current Fed watching.

Let me quickly rip through what strikes me as the two most important points raised there. First, forecasting is very difficult, but thankfully it is not really necessary for good policy making. The trick is not to get dug in and to be nimble.

A close up of text

Description automatically generated

Source: David Wilcox, as linked above

Incidentally, this same principle applies to policy rules including the Taylor Rule. The chief advantage of policy rules is not that they prescribe the appropriate policy rate, despite what you may have read on Bloomberg today. The chief advantage of a policy rule is that the feedback signals make it, under normal conditions, robust to being wrong. But the Fed can’t just say, well this month, what the heck, let’s go with Taylor. It does not work that way.

Second, offering rates guidance can undermine nimbleness by creating (my terminology) cognitive dissonance. And the most unfortunate recent example of that was the reaction function announced in the September 2020 FOMC Press Release that did in fact contribute to the Fed’s serious policy error over the subsequent 15 months or so. (For the links reference below, please go to the original.)

A screenshot of a computer

Description automatically generated

Source: David Wilcox, as linked above.

The first point is fun in part because it undermines the pomposity of much Fed commentary, especially on communications. If the Fed knowing, which they don’t, is not that important, then our hearing every one of their waking thoughts is particularly unimportant. (They need to tell us their goals only.) The second point is the more important in my view, and it is one I have raised many times myself. The practical point here is that the Fed probably agrees with David Wilcox, much more obviously than they might agree with little old me. They are not guiding on rates, and they really do not care if we do not understand that. They have a lesser need to correct our misperception, should it arise, than the consensus believes. Wilcox does not make this point himself. But it would arise if the Fed leadership were to agree, which I assume they do.

DISCLOSURES AND DISCLAIMERS

Analyst Certification

The analyst, 22V Research Group, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.

Analyst Certifications and Independence of Research.

Each of the 22V Research analysts whose names appear on the front page of this report hereby certify that all the views expressed in this Report accurately reflect our personal views about any and all of the subject securities or issuers and that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views of in this Report.

22V Research (the “Company”) is an independent research provider. The Company is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment adviser. 22V Research has no other regulated or unregulated business activities which conflict with its provision of independent research.

22V Research, LLC is a professional services and independent publication organization. 22V Research, LLC is not a securities broker-dealer, not a member of the Financial Industry Regulatory Authority (FINRA), not a registered investment advisor (RIA) and not a member of SIPC.

Securities transactions, when offered, are offered by 22V Securities, LLC through LPS Capital, LLC. Certain employees of 22V Securities, LLC are dually registered as securities representatives of LPS Capital, LLC or Analyst Hub Securities, LLC. 22V Securities, LPS Capital and Analyst Hub Securities are members FINRA, SIPC.

https://brokercheck.finra.org/

Current Ratings Definition.

SECTOR OUTPERFORM: An “outperform” rating anticipates the company will outperform the S&P Regional Banking Index (peer group).

SECTOR PERFORM: A “market perform” rating anticipates the company will perform in line with the S&P Regional Banking Index (peer group).

SECTOR UNDERPERFORM: An “underperform” rating anticipates the company will underperform the S&P Regional Banking Index (peer group).

Limitation Of Research And Information.

This Report has been prepared for distribution to only qualified institutional or professional clients of 22V Research Group. The contents of this Report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this Report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any research or other material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. 22V Research Group shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information or research obtained from 22V Research Group.

Reproduction And Distribution Strictly Prohibited.

No user of this Report may reproduce, modify, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the Report itself or any information contained therein. Notwithstanding the foregoing, clients with access to working models are permitted to alter or modify the information contained therein, provided that it is solely for such client’s own use. This Report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyrights, Trademarks, Intellectual Property.

22V Research Group, and any logos or marks included in this Report are proprietary materials. The use of such terms and logos and marks without the express written consent of 22V Research Group is strictly prohibited. The copyright in the pages or in the screens of the Report, and in the information and material therein, is proprietary material owned by 22V Research Group unless otherwise indicated. The unauthorized use of any material on this Report may violate numerous statutes, regulations and laws, including, but not limited to, copyright, trademark, trade secret or patent laws.