Essence of Decision
September 16, 2016·0 comments·monetary policy
The Fed's decisions are explained by economic models. But what if those models are just cover stories for something else entirely? The institution that markets believe exists to support asset prices is actually motivated by something far more selfish: protecting its own reputation. And right now, that reputation is in free fall.
• The Fed's public image has collapsed in a way most people haven't noticed. Gallup polls show the institution now ranks below the IRS in public confidence, despite a tripled stock market and years of recovery. The narrative around negative rates and quantitative easing has turned decisively hostile.
• Economic models can't predict what's coming because they miss what actually drives the decisions. The rational expectations framework assumes the Fed cares about market outcomes. It doesn't. The Fed, like any large research institution, cares about one thing: whether people think it's competent.
• The public turning against the Fed's policies creates pressure inside the institution itself. When Larry Summers and trusted Fed confidants like Jon Hilsenrath start publicly criticizing the central bank, the internal dynamics shift. High-reputation players begin looking for a way out.
• There's a specific political mechanism that allows the Fed to act without owning the consequences. By hiking rates and declaring victory on their mandates now, they can blame elected officials later if the economy deteriorates. It's the perfect cover for institutional self-preservation.
• What happens next won't be determined by data or Taylor Rule inputs, but by which senior Fed officials stake out the first position in the room. Once a high-reputation governor commits to a direction, others follow to be seen as part of the smart consensus. The gravitational pull of early commitment matters more than economic fundamentals.
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