Changing Expectations

Sept. 7, 2012
The Federal Reserve makes a false assumption that feelings about the future drive economic trends.

Federal Reserve Chairman Ben Bernanke’s Jackson Hole speech defended prior Federal Reserve Board actions and made the case of another round of quantitative easing (QE3) in the relative near term. There are several options available to them, the details of which are not important for this discussion. One of the more intriguing was a belief that the Federal Reserve Board could manage people’s expectation of the future, and that would in and of itself make the future better. The theory is that actions follow group belief. 

That could also be stated that we regularly succumb to self-fulfilling prophecies be they positive or negative. The problem with that is that business confidence indicators are not statistically reliable leading indicators. Our CEO, Brian Beaulieu, just looked into this subject and determined that the business confidence index for the U.S. and China are not reliable. This means that the Fed can work as hard as they can to change people expectations, but that does not change the future. Economic realities and trends determine the future, not our feelings about that future.  

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