On Wall Street, there’s an adage, “Don’t confuse brains with a bull market.”
Fed chief Janet Yellen should have that crocheted and framed and hang it in her office.
On Wednesday, the final first-quarter GDP was announced at a staggering -2.9 percent annualized.
Yellen’s Fed had as recently as Dec. 18, 2013 — a mere two weeks before the first quarter began — forecast 2014 to be a strong year of positive 2.8 percent to 3.2 percent GDP growth, with no negative quarters.
This also marks four years, or 16 quarters, since the last time the Fed was correct on an economic forecast.
So how can these people ever devise a solid economic or monetary policy if they are so off with their projections?
This Fed thought we would have a GDP growth of 3 percent just before Christmas, and got -3 percent soon after Flag Day.
That’s a 6 percent whiff.
If you do some back-of-the-envelope calculations, that 6 percent miss could translate into a $1 trillion shortfall annualized. That’s how big a miss it is.
So, on Thursday — just one day after the worst negative GDP contraction in five years — out comes St. Louis Fed CEO James “I haven’t been right with a forecast in years” Bullard, stating that the markets “don’t appreciate how close the Fed is to its goals.”
Sure, the Dow Jones has been hanging in there, bouncing around new highs, but that’s not because of robust economic growth; in fact, it’s because of the opposite.
Low- to no-growth environments mean interest rates remain low in the bond market, and therefore most investors recognize that stocks are cheaper on a relative basis to bonds and their puny yields.
It’s just Darwinist-style investing: Money goes where it’s treated best, and 2.5 percent yields for 10 years or 0.15 percent in a savings account is just not as appealing as stocks.
Besides, as confusing as that may seem to the Fed, just because the Dow rallies or sells off or corrects or starts a new bull market, those are essentially non-economic events by themselves, in terms of employment or inflation.