The UBS economists observed that groupthink could lead to major policy errors.
Hint: it already has in the form of zero interest rate and quantitative easing policies.
The Federal Reserve surprised observers last Wednesday by revolutionizing its strategy for communicating with the public on its monetary policy outlook through the introduction of the "Evans Rule."
By adopting the Evans Rule, the Fed has now laid out thresholds that must be met before the central bank will consider raising interest rates, which have been held near zero since the financial crisis several years ago....
The change has been hailed by critics of the Fed – those who charge that the central bank has not done enough to stimulate the economy – as a crucial step toward tapping its full stimulative potential by more forcefully shaping market expectations.
UBS economists Drew Matus and Sam Coffin do not share such a positive view of Wednesday's meeting as everyone else, however.
In fact, Matus and Coffin suggest that contrary to popular belief, the Fed's latest decision actually makes things more dangerous for markets and the economy.
In a note, the UBS economists warn clients, "Given that policy is now tied to the perceptions of a small group of individuals who all adhere to the same orthodoxy, this implies that monetary policy will continue to operate as a poor substitute for responsible fiscal policy and that the possibility of policy errors from such 'groupthink' remains a key risk for the foreseeable future."...
Matus and Coffin conclude that a dangerous dynamic may be brewing inside the Fed:
In short, consistency is lacking and the FOMC is increasingly tone deaf.
This may be because, within the Federal Reserve System, the hawks are primarily “freshwater” economists who are concerned about the ever expanding balance sheet.
In contrast, most of the rest of the FOMC are either non-economists (the majority of the Board of Governors) or “saltwater” economists. These economists dominate not just the Fed, but a number of central banks around the world.
As such, critiques are limited and critics outside the Fed often dismissed out of hand.A characteristic of groupthink.
Given that policy is now tied to the perceptions of a small group of individuals who all adhere to the same orthodoxy, this implies that monetary policy will continue to operate as a poor substitute for responsible fiscal policy and that the possibility of policy errors from such “groupthink” remains a key risk for the foreseeable future.
Meanwhile, with Richmond Fed President Jeffrey Lacker, the lone dissenter in several of the Fed's most recent policy decisions in 2012, set to become a non-voting member on the Committee in 2013, that groupthink may grow even stronger.Groupthink among central bankers has been growing stronger since the beginning of the financial crisis. Please note that they are all pursuing the same policies that Japan has shown failed over a 2+ decade period following its bank solvency led financial crisis.