In Ancient Greece, Oracle of Delphi is told as being unable to predict anything at all, instead issuing ambiguously worded forecasts in order to cover any and all possible outcomes.
“As monetary policy has gained enormous importance for the behaviour of financial asset prices amidst unprecedented economic tidings since the 2008 crisis, the US Fed has similarly attained a somewhat similar status to the Oracle of Delphi,” said Medeiros.
“Last week saw the release of generally strong US data,” Medeiros continued.
“The Beige Book for the April Federal Open Market Committee (FOMC) meeting suggested stronger economic activity. Retail sales, jobless claims, and inflation also pointed to a better economic outlook. The more hawkish minutes of the March FOMC meeting released on 9 April also showed a committee biased towards normalising monetary policy sooner rather than later.”
Yet, at this very juncture of stronger data, Medeiros noted Fed Chairwoman, Janet Yellen, appears to remain dovish, speaking of significant slack in the US labour market, soft inflation, and downside risks to the economic recovery.
“She reminded markets that the Fed’s economic forecasts were also disrupted in 2010-2012 by downside surprises. Taken as a whole, the Fed’s position now appears as ambiguous as any position adopted by the Oracle of Delphi.”
Medeiros said he accepts the Fed cannot predict the future: “It also has a strong incentive to maintain its credibility for as long as possible, especially on account of extremely large, longer-term inflation risks.
"The Fed understands that the economy has ‘headwinds’ – a euphemism for the large stocks of debt still present across all sectors of the US economy – that remain a major risk to growth in the event of interest rate shocks such as the one seen in 2013.”
Finally, he added, the Fed will generally want to appear hawkish during periods of weaker data, because this means that it can be less hawkish during periods of stronger data.
He concluded: “We note in passing that investors hungrily snapped up bonds when Greece successfully returned to the market for the first time since its dramatic default in 2011. The fact that appetite for Greece’s new bonds is so strong – despite the country’s 175% debt to GDP ratio – indicates that many investors still believe firmly in Oracles.”
