The Fed’s wise decision
I thought yesterday’s policy announcement would offer a nice natural experiment, but instead it served up perhaps the most muddled stock market response I’ve ever seen. Indecision, then a big move upwards, then an even bigger move downwards.
One problem is that it’s harder to interpret market responses when the more likely outcome occurs. The response to “new information” will be much smaller. But even so, there was some genuine uncertainty. And if you look at other markets you could see a clear response. Indeed it almost looks like Wall Street was hit by two shocks—easier than expected money, and then (an hour later) slower than expected RGDP growth.
I still believe a 1/4% rate increase would have reduced stock prices, but of course the response to yesterday’s announcement doesn’t really provide any support for that. One alternative is that the announcement didn’t matter at all. But then why did the other markets clearly respond? Most likely, the various markets were hit by two shocks, easier money and weaker expected growth. In the equity markets those two shocks worked as cross purposes, whereas in the bond and forex markets they both pushed in the same direction. Both shocks tended to depreciate the dollar and also reduce bond yields.
And it doesn’t even end there. European markets plunged today, and the dollar regained the ground lost yesterday. Go figure.
The only thing I have some confidence in saying is that it was a wise policy decision. Even today the bond markets are clearly signaling the Fed will fall short of its inflation target; next year, next 10 years, next 30 years. Money is still too tight, and Kocherlakota (who called for a rate cut) is the only one who got it right. As usual, the VSPs laughed at him like he was your crazy uncle, hid away in the attic—the usual reaction when someone points out that the conventional opinion in monetary policy is wrong.
Although money is too tight to hit the Fed’s goals, it’s not necessary too tight for a well functioning US economy, and that also might help explain the muddled response.
Off topic, a commenter directed me to a very interesting podcast on Chinese data. The five China data experts all seemed to think the Chinese data was not manipulated for political reasons, and that the statisticians in Beijing do the best job they can under difficult circumstances. I learned that a lot of what you read in the press is misinformation. For instance, this LA Times story on bad Chinese data is based on interviews with one of the people in the podcast, but totally mischaracterizes her views—making her seem much more of a China skeptic than she actually is.
Over at Econlog I have another post on Chinese data accuracy, for those who aren’t sick of the subject. (I tried to inject some humor this time.)
And I highly recommend this Lars Christensen post, which discusses the echoes of the 1930s in the current political environment.
Tags:
18. September 2015 at 15:54
Slightly OT: But I wonder if Scott or anyone else knows exactly how U3-U6 data gets collected. It says survey, but does it mean they call people up like pollsters do?
Reason I ask is that there was an article recently saying how pollsters are having a serious problem because of low response rates. Basically young people just don’t have the patience to sit through and answer pollsters questions. http://www.nytimes.com/2015/06/21/opinion/sunday/whats-the-matter-with-polling.html?_r=0
Recently, there has been a lot of talk about how the fall in U3 doesn’t seem to square with the lack of rise in wages. Is it possible that we are understating U3 because of our inferior sampling methods? Are the only people who are picking up the phone to BLS surveyors older people who are less likely to be unemployed? Just a thought I had…
18. September 2015 at 16:30
Roman, your thought is wrong:
http://www.gallup.com/poll/185483/americans-optimistic-job-market-september.aspx
The reason employment has been rising is because wages aren’t as sticky as in 09.
18. September 2015 at 16:41
Another angle I read on market reactions. That the Fed said it was leaving rates unchanged because of slower growth in China which could be interpreted as the Fed having (even) less clarity of purpose than we thought before the meeting.
Similiarly, I see comments in the media focus on The Bond Market Massacre of 1994 as “bad” because of losses in the financial market, when the effects on the real economy (“Main Street”!) were as good as we could have hoped for. This is from the samee folks that were so happy from 2004 to 2007 because they loved those little 1/4 point ratchets. So predictable and communicated.
18. September 2015 at 16:54
I do not think the Fed decision was wise. I think they should go back to regular, sustained QE at perhaps $50 billion a month.
On China, Carlyle Group is investing hundreds of millions of dollars into a Chinese real estate internet portal, it ran on the wires yesterday. Yes institutional investors can make bonehead decisions like anybody else. The fact is, large institutional investors are still taking positions in China.
……..
IDG Capital Partners and the Carlyle Group are investing $1 billion in Beijing-based online real estate portal SouFun Holdings alongside the company’s management. According to information disclosed in the firm’s second quarter results, half of this investment will take the form of convertible notes. Under the terms of the memorandum of understanding, the new Class A ordinary shares are priced at $7.45 per current American Depository Share (ADS), representing a 3% premium to the volume-weighted average trading price of the…
18. September 2015 at 17:32
Scott,
A considerable portion of the decline had to do with bank stocks. These were likely hurt because a slower rate-hike path reduces their expected net interest margin. There was a point when the financial sector would rally strongly because monetary accommodation was good for the balance sheet, but that’s over.
https://pbs.twimg.com/media/CPIf2VmU8AA0W88.png:large
18. September 2015 at 17:37
Her language was ‘too tight’, implying a rate increase was likely by the end of this year, showing charts that imply rates up to 3.5% by 2018, laughing off the idea of zero rate policy for an extended period of time or negative interest rates. All of that would have spooked the markets I think.
18. September 2015 at 18:29
Liberal, I agree with E. Harding—the wage moderation has brought down the unemployment rate.
Bill, I saw those comments too, but of course the Fed has always paid some attention to international factors.
Ben, Good point, I meant wise relative to raising rates.
Evan, I find that persuasive, but it still doesn’t really address the issue that most confuses me—why was the reaction so erratic? Was that 1% stock price increase a reaction to the policy? If so, why was it delayed? And how about the later drop in stock prices. Was that a reaction to the Fed? If so, why was that delayed even more? Was it a reaction to something Yellen said? If so, what?
Britonomist, I suppose that’s possible, but I didn’t find her statement to be particularly surprising.
18. September 2015 at 18:49
Scott,
I think Christensen’s overstating things a bit in the US and UK, but what he says obviously can apply to countries in Europe in the midst of a deep depression.
Of course, my opinion could change about the US if Trump or one of the other crazy, know-nothing Republicans wins office. If a Republican wins, let it be Kasich.
In the UK, at most Corbyn might take the UK back into the 70s, which is bad, and even pathetic, but not Hitler or Stalin bad. It’s perhaps much more likely he’ll just take Labour back to the 80s.
18. September 2015 at 19:31
Sumner: “Go figure” – smarter minds that you and I have done so Scott. One of them is named Ben. His FAVAR paper (did you ever read it?) says Fed policy shocks are 3.2% to 95% confidence (i.e., nearly trivial). Money is neutral. Quit fighting this idea. BTW, a logical consequence of this idea is that your NGDPLT is not necessarily such a bad idea. It’s like improving the productivity at a factory by first raising the level of lighting then lowering it again. Both changes have been found in some experiments to raise factory productivity. Nobody really knows why, but it’s a harmless placebo. Perhaps people like to see changes and respond positively to them. Likewise NGDPLT is a harmless placebo.
18. September 2015 at 19:54
“I thought yesterday’s policy announcement would offer a nice natural experiment, but instead it served up perhaps the most muddled stock market response I’ve ever seen. ”
No, you’re muddled.
The market is not a singular consciousness. Only a single consciousness can be muddled.
The market is in reality composed of millions, billions of individuals. If the stock index goes up then down, this is a reflection of many different individuals who each had their own plans. It is not all one group of people making the same set of choices up and the the same set of choices down.
Aggregated muddleheadedness.
18. September 2015 at 20:46
Ray,
“nearly trivial”? Is that like “Almost not important” or “probably not mission-critical”? If I recall, the paper had numbers higher than 3.2%
18. September 2015 at 22:08
@Cliff- read the paper yourself. Bernanke is saying the 3.2% figure is ‘statistically significant’ but he stops short of drawing the obvious conclusion that while statistically significant (i.e., not due to chance alone) it’s not that important. And the 13.2% upper figure has as much chance at occurring as the 3.2% figure (to 95% confidence). The band tells you how much play there is in the numbers (that is, a range of 0-99% to 95% confidence would be akin to noise). The bottom line: 3.2% to 13.2% is a very low number for the effect of a Fed monetary shock on an economy. You and I and MF and Sumner are all wasting our time here debating such a small effect.
18. September 2015 at 22:13
Scott wrote:
I thought yesterday’s policy announcement would offer a nice natural experiment, but instead it served up perhaps the most muddled stock market response I’ve ever seen.
You don’t get to say it’s not a natural experiment *after* the results come in and they’re not what you expected. That would be like someone declaring in early 2013 that the year would prove a good test of–well, you get my point Scott.
(FWIW, I think we both were wrong. I’m assuming you predicted Fed would hold pat and market would rise, whereas I predicted Fed would raise rates 25 bps and market would fall.)
19. September 2015 at 01:03
Never reason from a price non-change.
19. September 2015 at 03:04
But it’s best to try to move price discovery into ever upward price levels and don’t worry about the bubbles, so who cares, right?
Just keep the easy money going until you get a response I suppose.
19. September 2015 at 05:12
This is a market that appears to be taking cues from the Fed. Had they upped their growth outlook or left it the same, you could make a strong case the market would have rallied on the news. In some respects, this looks like a “the Fed knows something we don’t” trade.
19. September 2015 at 05:34
Scott, Lars certainly was not saying things are as bad as in the 1930s.
Ray, You are confusing the statement “statistically significant” with “we can believe this result is valid” That’s not at all what statistically significant means. It just tells you how likely it is that the data would randomly fit that particular model. Most of the statistically significant findings in any field will not hold up when you try to replicate the results. And of course Ben Bernanke believes that tight money caused the Great Depression. Is that significant enough for you?
Bob, By “muddled” I did not mean no response, I meant hard to read response. Equity markets became far more volatile right after the announcement, and indeed probably were responding. It’s just that it was hard to tell what the response was when it moved one way, then another. If the market had been placid after the announcement I’d agree with you that it was a clear “result.” That would have indicated that the monetary decision had almost no implications for growth (a claim that I find at least slightly plausible.)
Neil, I agree that it looks that way. But that theory’s too ad hoc. The vast majority of the time the market response is not “It looks like the Fed knows more than I do.” Indeed the markets usually respond in the opposite way, as if the Fed knows less than they do.
19. September 2015 at 06:00
Scott,
I don’t think you handled Bob Murphy’s point. You thought it would be a natural experiment but it wasn’t. You seem to be saying that what made it NOT a natural experiment was the muddled results. I agree with you that the results are hard to read. So you could say it’s a natural experiment whose outcome is unclear. But it’s hard to see why the muddled results make it not a natural experiment. To say that it’s not a natural experiment, you need to point to something else that changed at the same time.
19. September 2015 at 06:47
Scott, you seem to be thinking of this debunk-er of statistical findings, Ioannides of Ioannina. He’s a pretty famous Greek medical stats researcher that’s gotten attention in the USA too.
http://www.theatlantic.com/magazine/archive/2010/11/lies-damned-lies-and-medical-science/308269/
“In the late 1990s, Ioannidis set up a base at the University of Ioannina. …In 2005, he unleashed two papers that challenged the foundations of medical research. … Simply put, if you’re attracted to ideas that have a good chance of being wrong, and if you’re motivated to prove them right, and if you have a little wiggle room in how you assemble the evidence, you’ll probably succeed in proving wrong theories right. His model predicted, in different fields of medical research, rates of wrongness roughly corresponding to the observed rates at which findings were later convincingly refuted: 80 percent of non-randomized studies (by far the most common type) turn out to be wrong, as do 25 percent of supposedly gold-standard randomized trials, and as much as 10 percent of the platinum-standard large randomized trials. The article spelled out his belief that researchers were frequently manipulating data analyses, chasing career-advancing findings rather than good science, and even using the peer-review process””in which journals ask researchers to help decide which studies to publish””to suppress opposing views.”
But ask yourself: Ben S. Bernanke is a monetarist like you but he only finds a low central bank effect on the economy (using historic data, so unlikely other researchers will come up with different numbers unless they pick another time period than Bernanke did, who chose January 1959 through August 2001). Thus according to the Ioannidis model, Bernanke has incentive to find Fed influence, but he only finds 3.2% to 13.2%, a low number. That should give you pause.
I find it sad that people like David R. Henderson take you to task for small peccadilloes like mis-characterizing a ‘natural experiment’ while they omit to mention the elephant in the room, the lack of data to show the Fed has much influence over the real–or even, strangely, the nominal–economy.
19. September 2015 at 06:48
Markets predict the future, but what future? Is it the one 15 minutes from now? The one 6 months hence. Or some far off distant time? And another thing, markets can only predict the future based on current information, but information is not only always changing but it is opaque.
The market predictions of what oil would be in 2015 were horribly wrong. For the only thing saving the shale producers this year is their oil contracts that will pay them $90 a barrel for oil that is selling for below that price. Whoever is on the opposite side of those contracts was a terrible prognosticator! The market of buyers and sellers settles on a price but this price is based on what buyers and sellers know in the moment. Neither knows the future which is precisely why futures markets were created! If the future was known there would be no need for a futures market.
All this to say that an NGDP futures market may not have the predictive powers Scott wants it to have.
19. September 2015 at 06:52
What were the odds before the Fed announcement? Say something like this:
25%: Rate increase
70%: Stable rate
5%: Rate decrease and/or QE
The market was priced along that probability distribution (well, actually, along its own prob distribution). Then, to borrow from quantum mechanics, the probability distribution collapsed after observation of the Fed announcement (to 100% Stable rate). The probability distribution for the next announcement was also updated.
But essentially, it seems to me that the Fed acted as expected, so the market didn’t move in a clear direction.
19. September 2015 at 06:59
David, Yes, I meant it’s a natural experiment who’s outcome is hard to read. I thought we’d get a clear reading, but we didn’t. So it’s as if there was no experiment at all. The test tube was accidentally dropped on the floor, before we could get a clear reading of the contents.
I still think the market would have dropped on Thursday with a .25% increase (as does Bob) but we won’t ever know the answer to that question. Need more derivatives!
19. September 2015 at 07:06
Ray, Does Bernanke think the Fed caused the Great Depression? Yes or no?
Is the Great Depression important? Yes or no?
And no, I’m not thinking of “that debunker”, who I’ve never heard of, I’m reporting common knowledge, which isn’t even slightly controversial. Are you telling me you had to google this information to see if I was right?
Dan, I’m not even going to respond to that.
LK, No, because there was no prospect of a rate cut, and the other markets responded strongly. So the action was not expected.
19. September 2015 at 07:35
Britonomist,
I think there’s a great chance you’re right.
19. September 2015 at 08:09
“The test tube was accidentally dropped on the floor, before we could get a clear reading of the contents.”
That’s not it at all. The contents of the test tube, i.e., the record of the stock market movements, is very clear. The fact that you don’t know what conclusions to draw from the contents of that test tube doesn’t mean the contents are unknown because the test tube was dropped. Science shouldn’t disregard test results simply because they don’t go the way one originally predicted. This isn’t a case of a dropped test tube; it appears to be a case of throwing the contents of the test tube out after the experiment was conducted It is not as if there was no experiment.
19. September 2015 at 08:13
Vivian, Maybe clear to you, but not to me. Stocks became very volatile after the announcement. That’s not a problem if the trend is clearly up or down, but in this case it was both. Which point in time is the market reaction? Be precise to the second.
19. September 2015 at 08:20
To be honest, I am little more of a monetary hawk here as housing prices are strengthening in which I don’t think is a good thing. (Real wages are still not rising and any improvement in real wages is a short term low oil price drops.) However, I still don’t see why they don’t lower their balanace first before dealing with the Fed rates. I think market is basically ‘meh’ on and what we see is 95% overreaction.
In terms of China data, I agree with you that it is better than most experts state but I think China needs to develop secondary non-government measures as well. That is one reason why the US government numbers are so believable as there are a lot of secondary measures we can compare. The monthly payrolls are proceeded by a ADP report while CPI has the billion price measures that show the same general direction.
19. September 2015 at 09:42
Scott,
Your response indicates you don’t get the point. As your response indicated, the data is available *by the second*. This is not an issue of lack of data; it is an issue of how to interpret the data. The test was done; the data is in. The test tube is intact.
FWIW, I watched the S&P movements from shortly before 2pm. I believe that this is when the announcement was off embargo. My armchair observation was that the overall market went down for a short time before 2pm and then at 2pm it went up until about 2:50 pm and then it went down below its 2pm level. That’s the data.
I’m not out here articulating or defending a model that is purportedly supported by market reactions; but it seems that you are. So, It’s especially up to you to examine the contents of that test tube to determine whether or not they are consistent with the model you’ve been promoting. That may be a difficult task; but, don’t tell me the test tube was dropped or that it is “as if the experiment didn’t happen”.
19. September 2015 at 10:04
Sumner: “Ray, Does Bernanke think the Fed caused the Great Depression? Yes or no?”
Me: I don’t know, but I suspect ‘yes’. Friedman thought so too, as did Keynes, for different reasons. Fooled by Randomness.
Sumner: “Is the Great Depression important? Yes or no?”
Me: Yes, from a history point of view. No otherwise (as economics is random). Google: collapsing sandpile, economics, nonlinear, or, for a concrete (stepped) model: Abelian sandpile model
Sumner: (incredibly!): “And no, I’m not thinking of “that debunker” [OMG! Google ‘John Ioannidis’], who I’ve never heard of, I’m reporting common knowledge, which isn’t even slightly controversial. Are you telling me you had to google this information to see if I was right?
Me: No comment. If you’ve never heard of world famous Dr. Ioannidis, who is the modern original source author for all of what you consider ‘common knowledge’, that speaks volumes. And Google is your friend…
19. September 2015 at 10:44
Collin, I realize that 95% of the country agrees with you, but housing starts for the past 15 years, which includes the “bubble” have averaged less than 1.3 million housing starts a year, which is worse than any single 7 year period of housing starts since data has been compiled (1959). Housing, including the “bubble” period has experienced a massive supply depression. So, to cite low wage growth and high housing costs as a reason to limit demand is freaking outrageous, even if popular.
19. September 2015 at 13:48
Jim Cramer argued that while it dropped 200 points with a cut it would have dropped 500 points with a hike.
19. September 2015 at 17:22
“Bob, By “muddled” I did not mean no response, I meant hard to read response. Equity markets became far more volatile right after the announcement, and indeed probably were responding. It’s just that it was hard to tell what the response was when it moved one way, then another. If the market had been placid after the announcement I’d agree with you that it was a clear “result.” That would have indicated that the monetary decision had almost no implications for growth (a claim that I find at least slightly plausible.)”
Can it be that Sumner really doesn’t know the difference between a devalued dollar and higher prices on the one hand, and growth on the other?
On a side note, if the stock market went up after the announcement, and kept going up, then Sumner would have made victory laps, just like has in the past.
But when it doesn’t, he’s not muddleheaded. No, the market is now muddleheaded.
The market is always most right…but only when it agrees with Summer.
Hahaha
19. September 2015 at 17:52
It was a wise decision, but the announced reasoning implies that the Fed is still committed to raising rates before the price level is back (or even looks like it will soon be back) on its pre-crisis trend. It has not changed it’s policy (whatever that is), just their view of the short term. THAT re-commitment to a a misguided — and ambiguous — policy is the bad news.
20. September 2015 at 05:13
Vivian, You said:
“So, It’s especially up to you to examine the contents of that test tube to determine whether or not they are consistent with the model you’ve been promoting.”
This has nothing to do with testing “the model I’ve been promoting”. AFAIK all models predict that easier than expected money makes stocks go up. Bob Murphy expected the same reaction.
You don’t like the test tube analogy. That’s fine. But it doesn’t change the fact that we don’t really know how the market responded to the announcement. Yes, we know the market price second by second, but we don’t know how the market responded to the announcement. Your comment makes it seem like the market went up in response. But the initial increase was so small that it doesn’t seem statistically significant to me. Then later it went up much more. But was that a response to the announcement or Yellen’s comments? I don’t know.
Then it went down even more.
I also notice that you didn’t answer my question. When commenters fail to respond to a specific question I generally take it as an implicit concession on their part that I’m right.
20. September 2015 at 05:45
Scott,
Exactly what is it that you are “right about’ that you think I’ve contradicted? That this wasn’t a test or a natural experiment? Or, that the data has somehow been lost of the floor?
Please be precise.
20. September 2015 at 07:05
I’ll tell you what Vivian. You show me the courtesy of answering my question and I’ll show you the courtesy of answering yours.
20. September 2015 at 07:48
OK, Scott, I wouldn’t want to be discourteous to you.
First off, I think your “question” was contained in the following response to my original comment:
“Vivian, Maybe clear to you, but not to me. Stocks became very volatile after the announcement. That’s not a problem if the trend is clearly up or down, but in this case it was both. Which point in time is the market reaction? Be precise to the second.”
As far as the first sentence is concerned, it’s not clear what was supposedly clear to me that was not clear to you. Your style of communication is often rather opaque. Second, the question “Which point in time is the market reaction” is not clear as to “reaction to what”? But, I’ll assume that you meant reaction to the “no” decision on the rate rise.
Let me say that this is like answering a multiple choice question designed by Scott Sumner where none of the answers are correct. But, the honest answer is that I don’t and never have believed that “market reactions” can be used in the way that you think they can. There are simply too many variables, as I think you now are discovering with this “natural experiment” and that one cannot point to a particular second in time where everything is clear. That’s not to say, of course, as you earlier stated, that the test tube was dropped, or that it is “as if the experiment didn’t happen”. If the experiment was no good, it’s most likely because they are never good, unless of course one thinks that the data clearly supports one’s priors.
An earlier commenter, I forget which one, I believe made the rather sensible observation that if markets, particularly broad stock markets like the one we’re talking about here, are good predictors, what is the time frame of their predictions? This is related to the issue of what second in time does the market sentiment prove that a particular decision (e.g. of the Fed) was a good one or not? Good for what time frame? The next 20 minutes? The next 6 months? The next 10 years? Those are questions that I don’t think economists are able to sort out, nor do I think they likely will ever be able to. I wouldn’t surprise me, for example, that the markets thought the no rate hike decision would be good in the very short term. A shot of dope is good for a short time, too.
Sorry for the long-winded response, but if you want a shorter, more direct answer, it would be this:
The results of this natural experiment are not clear, because they never are even though the data is there for all to see (a better preserved test tube would be hard to find). And, in this particular case, they don’t lend support to the notion that failure to raise interest rates is good for the market, or the economy. Or, an even shorter version: Yes, Scott, you’re right. You don’t know what to make of it.
20. September 2015 at 09:14
I am mildly puzzled at your assertion that the market reaction can be interpreted in any meaningful way. It is extremely rare for the Fed to surprise the market. Given the 70% probability of no change, the Fed would have likely signaled that was off if they intended to hike. Expectations were no hike. But what did the market “want”? I believe the market does not know what it wants regarding fed funds target rates. It wants growth, but it is very hard to determine what Fed Policy is most conducive to that.
Maybe there were short covering speculators in the first 30 minutes. Maybe there were long speculators believing the liquidity equity rally would begin to re-emerge. Maybe there were intraday reversal day traders getting signals at the top causing them to short. Maybe it is obvious the Fed is in internal disagreement and that caused general short term confusion.
I am just making things up. I had no reasonable expectation how the market would react. My 51/49 (I.e., virtually random) guess was the market would drop after the announcement regardless of what they did. Because I could not think of any plausible “good news” which could be derived from either action.
We are just stuck in the mud.
20. September 2015 at 12:45
@all
In my experience, markets can be very slow about princing in a broader macro scenario. I am with Soros here, markets are always wrong (and they jump from a “consensus” to another), and with Hayek, markets are a discovery process (and therefore, a lot of “candidate consensus” may be tried before there is a clearer winner (given a certin time period). Maybe the market monetarists are indeed right, money is tight, and having said so, nothing wrong with a stock market “correction”, even if later, markets find out that there is nothing wrong with the money supply, and prices continue to go … wherever “they” want to go …
21. September 2015 at 05:16
Vivian, So you insist we have the data for a clear answer to the natural experiment, but don’t know what the data is. Fine. My view is that you need to look at the reaction over the 30 to 60 minutes after the announcement. In past announcements, that period has generally been very volatile, as the market digests the Fed statement, and people discuss its implications. In many cases where the announcement is a surprise, the market moves sharply up or down, and stays there for the rest of the trading day. That’s a pretty clear result. What made this confusing is that there were big swings after 2pm, suggesting that other information beyond the announcement itself was also impacting the market. Or perhaps the market was responding to aspects of the announcement beyond the headline decision not to change rates. In any case, the greatly increased fluctuations suggest that equity traders in some sense “cared” about the announcement, it doesn’t look like a non-event. The market immediately became more volatile. But I still insist it’s hard to tell if the announcement raised or lowered equity prices. Maybe dropped test tube is the wrong analogy, perhaps “contaminated” is better.
Mike, You do know there’s a long history of market reactions to Fed announcements, don’t you. This isn’t a “blank slate” we are working with.
21. September 2015 at 09:11
Scott,
Thanks for your courteous response, but I’m still puzzled by what “you got right” that I contradicted. Did I not keep my part of the bargain?
However, I’ve got to object to this, which is a misrepresentation of everything I’ve written:
“So you insist we have the data for a clear answer to the natural experiment, but don’t know what the data is.”
I actually wrote this:
“…I don’t and never have believed that “market reactions” can be used in the way that you think they can. There are simply too many variables, as I think you now are discovering with this “natural experiment” and that one cannot point to a particular second in time where everything is clear.”
How you could have summarised, as you did in that sentence, what I wrote is beyond me. I’ll rephrase it as follows: The experiment happened and the data is clearly there; a clear answer to the question you raise from it is not.
And, by the way, because there are *always* many variables in these uncontrolled experiments, that test tube is always “contaminated”. There may be natural economic experiments; but, that means, almost by definition, that those economic experiments are not controlled.
21. September 2015 at 11:03
My point was not that I thought that he contradicted you. It seemed to buttress your point:
“I still believe a 1/4% rate increase would have reduced stock prices, but of course the response to yesterday’s announcement doesn’t really provide any support for that. One alternative is that the announcement didn’t matter at all.”
So I read Cramer’s claim as actually agreeing with you. Am I missing something?
21. September 2015 at 11:47
Vivian, Sorry to interject, but what point are you trying to make? It seems a bit all over the place. Scott says, ‘the data is there, but it’s difficult to interpret. Despite that I still think a 1/4 point rate hike would have led to greater hit in the stock market.’ What is your issue other than the test tube analogy?
That market reactions can never be evaluated with any confidence? That is clearly not the case; market reactions are sometimes more and sometimes less interpretable. On this occasion the reaction was more toward the ‘less interpretable’ end of the spectrum.
22. September 2015 at 17:27
Vivian, See Dustin’s comment, those are exactly my feelings. Is this all about semantics?
Mike, OK, I didn’t see your point previously.
25. September 2015 at 13:29
[…] Read Also: The Fed’s Wise Decision by Scott Sumner via The Money Illusion […]
28. September 2015 at 19:50
[…] I was mostly being a smart aleck when I pointed out that Scott Sumner was being Krugman-esque when he seemed to be saying that the Fed’s pivotal […]
28. September 2015 at 21:00
Sumner, no it isn’t just semantics.
What you and Dustin are not getting is that whatever the data looks like, you cannot claim the test failed or was not conducted on the basis of the outcome being different from what you expect, or be constrained to two outcomes only.
If your prediction is that the stock market should move a particular way for a particular time (the time component by the way Vivian brought up but you have yet to “courteously” respond to that) after an announcement by the Fed, but then after the announcement is made the stock market does not move a particular way for a particular amount of time, it rather moves one way and then the other before that time period is up, then this does not mean the test is incpnclusive, or that the test did not take place. It means your prediction was wrong.
Is it really so difficult to grasp? Krugman claimed 2013 would be a year that would test market monetarism, and then when the results were not what he expected, he then claimed it wasn’t a true test. That is precisely what you are doing.
Semantics? Bah. Refusing to answer until someone answers you first, and then you still don’t answer? Double bah. Latching onto a poster’s comments that define “My prediction was wrong” as “The results are not clearly interpretable”? Triple bah.
The stench. It is palpable.
29. September 2015 at 04:00
There is a reason participants say, “A bull market shrugs off bad news and runs with good, a bear market shrugs off good news and sells of with bad”, essentially, same news in different atmospheres can cause completely different reactions.
I learned early, attaching fundamental viewpoints to explain most market moves is a fools folly. Funnier is most people I would speak to would be talking 0 about this, I would expect a conversation more along the lines of “the market broke a consolidation pattern to the upside and then when that failed it broke the triangle to the downside and it was all she wrote from there”. Much much much much much more volume was transacted from people thinking that way then anything about the Fed. Your weighting to this is 0. Let’s just ignore the driving motivations behind the vast majority of the major players.
29. September 2015 at 06:37
derivs: You wrote: “I learned early, attaching fundamental viewpoints to explain most market moves is a fools folly.
I wouldn’t go quite that far, because some news is surprisingly good or bad and does indeed cause a market reaction. Recessionary news, for example, often catches markets flat-footed at first (and the Fed as well.)
However, as a young bond portfolio manager (long ago) I do remember watching prices move and then calling around to see what had happened. Of course, there’s always a “reason” out there somewhere for a move in either direction. It could be virtually anything that sounded bullish (if the market had risen) to bearish (if the market had fallen.) I remember noting all those “reasons” for future reading, but never returned to them once I understood what I was doing, i.e., looking for any justification for a market move that had already occurred.
Your point on technicals was brought home to me when I moved to a dealer bank just before the Treasury market took a massive dive and rates broached 10% for the first time on the long end. As I recall, rates had been playing around 9% or so and the market broke hard. The long bond trader, a technician, said at a meeting the next morning that he saw nothing to stop it until it hit a 10% yield, an incredible move at the time. It hit it in a few days and my respect for technicians increased accordingly. This was in late 1979, as I recall.
29. September 2015 at 13:49
This might be another one of those “nominal tomato” moments.