faulty Fed figuring

[Federal Reserve Chair Janet] Yellen said at least one thing of importance last week.... She confessed to the frightening truth that the Fed formulates its policies and actions based on forecasts of future economic developments. [Unfortunately] our monetary politburo couldn’t forecast its way out of a paper bag.... [I]t’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed U.S. economy and that balance sheets don’t matter....

[T]he economy is now seamlessly global, meaning that everything which counts -- such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks -- is planetary in nature.... Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidge to confirm the U.S. economy’s strength and that the Keynesian nirvana of full employment is near at hand....

[I]n today’s world of global labor competition in goods, offshored business services, episodic domestic gigs, temp agency labor delivery, and Wal-Mart style labor scheduling by the hour and time of day, week, month, and season, the whole idea of “full employment” is a relic.... [Labor distribution factors] shift and morph steadily over time and in response to new technological and cultural developments. They are utterly beyond the reach of 25 basis points of interest rate shifts on the money markets. So the unemployment rate tells you almost nothing useful. By contrast, there are an immense number of leading indicators which track the global credit bubble and false boom it enabled. They bear far more directly on the main street outlook than does the Fed’s primitive bathtub model of the US economy. 

-- David Stockman (The Daily Reckoning) Dec. 22, 2015