The FOMC meets next week and is scheduled to announce a policy decision at 14:00 Wednesday. We will post the results here then.

The likely outcome, alas, is unlikely to surprise anyone, given the Fed’s obsession with telling markets what it plans to decide before it decides it. It is widely expected that it will announce a hike of 25 bp in the Fed funds rate target, and we have no grounds to quibble with that expectation. Rather the markets will focus on anything in the announcement and the follow up press conference that might yield clues to the path of subsequent policy.

So what the Fed will announce isn’t much of an issue. I also have no particular opinion as to what it should do, as far the actual rate target is concerned. My quarrel is with its continued obsession with forward guidance. Mollycoddling Wall Street is not among its charges. It comes at a heavy price … the Fed’s reliance on talk about future policy contributes to its nearly always being behind the curve. If it has to decide what’s appropriate in advance, that directly inserts a lag between what it deems appropriate policy and when the policy happens. It’s also a form of monetary ease that has to be offset with tighter actual policy than otherwise would be required to achieve its goals. Its track record is far from distinguished too … the 2008 GFC and the highest inflation since the 1970s both occurred under this “transparency” regime.

The balance sheet is another problem. The Fed would prefer it just run behind the curtains while rates get the spotlight and microphone. Reality however doesn’t accommodate this preference. In the modern ample reserves regime quantitive policy matters a great deal. That the Fed’s balance sheet is still obese with MBS helps explain why it hasn’t been getting nearly the bang for the buck it would apparently like to see from a historically aggressive series of rate hikes. Monetary policy is just not nearly as tight as the course of rates alone would suggest. Stepping up the pace of MBS rolloff would have required a lot less heavy lifting on the rates front.

Another point worth reiterating is that for all the media talk about it, the Fed show isn’t something most investors need distract themselves with in the first place. The bond market leads, the Fed follows. To the extent it’s credible and matters, anything the Fed says has already been discounted in the yield curve. It speaks volumes without uttering a word. We talk about Fed policy for its entertainment value, but for everything about rate policy that counts, we watch the one year Treasury yield. Wherever the Fed is going, it will get there first.