Time and time again, I am amazed at how the “smart money” and those supposedly in the know continue to misread the economy. I’m not talking about President Obama, who is most likely as out of touch with what is going on in the real world as was President George W. Bush, nor am I am pointing the finger at Congress. Let’s face it — with the now non-stop campaign cycle, most of them have little time to sweat the details of the economy or the needs of their constituents. If you don’t believe that, perhaps you should spend some time understanding why United States Representative for Virginia’s seventh congressional district and Republican House Majority Leader Eric Cantor is now out of a job.
No, I’m talking about the Federal Reserve, which in theory is composed of several very bright minds when it comes to monetary policy and the economy. If we look at the Fed’s track record on forecasting changes in the economy or impending crises, saying the Fed is out of touch is like shooting fish in a barrel. After all, I am sure you’ve heard by now how the Fed looks at inflation, excluding food and energy. They do so even though those two components, which have been on the rise, take a bite of 15-20% from the average weekly paycheck. Perhaps one of the benefits of being inside the Fed is you don’t have to buy your own food or gas, or perhaps they are simply paid so much more than the average person that they don’t even notice the upward move in prices during the last few months.
What about the overall strength of the economy? Depending on how weak or robust it is, the Fed has to step up, tack or, in some cases, cut back its stimulative efforts. It would seem then that reading the economy and doing so correctly would be crucial to getting monetary policy right.
Yet, for all the information at their fingertips, it seems the Fed has perpetually been too optimistic regarding the economy. Granted, when the Fed and other economists made their 2014 forecasts back in late 2013 or early 2014, no one expected, and therefore did not account for, the severe impact of the harsh winter weather.
As we started off the year, the St. Louis Fed issued a forecast calling for gross domestic product (GDP) growth of 3.2% in 2014, which, to be fair, was on the high side of forecasts made by the Federal Open Market Committee.
Chris Versace is the editor of PowerTrend Brief — a FREE, weekly electronic newsletter. He also writes PowerTrend Profits, a paid monthly newsletter that helps individual investors profit through buying shares of companies poised to win big in the 8 PowerTrends, as well as writes the PowerTrader trading service that seeks to deliver short-term gains using stocks, ETFs and options. Chris has been ranked an All Star Analyst by Zacks Investment Research.