Federal Reserve chairman Ben Bernanke has championed more transparency for the central bank. But that could backfire if the Fed's projections are viewed as guarantees.
NEW YORK (CNNMoney) -- Some might say that the Federal Reserve is wisely taking a smart, wait-and-see approach regarding the economy. I am not one of those people.
The Fed may now be too bearish. It is now pledging to keep interest rates near zero for nearly another three years, pushing out its expectations for its next rate hike from mid-2013 to late 2014.
The Fed also lowered its growth forecast for the U.S. economy Wednesday, indicating that it now expects gross domestic product to rise at just a 2.2% to 2.7% rate in 2012.
The central bank may turn out to be right with its new outlook. But it's a bit odd that the Fed is rushing to tame expectations right at the same time that many large corporations are finally becoming more bullish.
Take a look at Caterpillar (Fortune 500). The construction equipment giant announced earnings that crushed estimates Thursday morning and also lifted its guidance for 2012. But what is even more telling is the economic outlook that Caterpillar gave.,
In its earnings release, Caterpillar indicated that it expects the U.S. economy to grow at a rate of at least 3%. Caterpillar also noted that it thinks the Europe debt crisis -- while still a "lingering negative" -- "is unlikely to trigger a worldwide recession."
Finally, Caterpillar said it thinks Japan's economy will pick up speed following last year's tsunami and that the economies of China and other emerging markets will continue to show solid growth -- albeit at a slightly lower pace than 2011. It is forecasting 8.5% GDP growth for China and 4% for Latin America.
That's decidedly more upbeat than the Fed, don't you think?
Now is Caterpillar's forecast too rosy? Perhaps. But it seems reasonable given the recent encouraging data about the U.S. job market, growing hopes that Europe may no longer be a continent on the ledge and signs that China won't have a hard landing.
"We probably will see continued improvement in the U.S. economy and that should translate into higher earnings growth," said Steve Rogers, manager of the Shelton Core Value Fund () in San Francisco.
As readers of this column should know, I have consistently been saying for awhile now that the U.S. economy is slowly but surely getting better. I'll spare you my cutesy phrase that references a certain backyard piece of cooking equipment for once.
That doesn't mean that the economy is completely healthy. But it is convalescing. So it might be time for the Fed to take off the 0% training wheels a little sooner than after the next midterm election -- especially if even more companies confirm what Caterpillar is saying. And several already are.
I spoke with Sandy Cutler, CEO of Eaton (Fortune 500), a Cleveland-based maker of electrical components and power systems for trucks and automobiles, Thursday. I asked him what his company's outlook for the U.S. is now compared to three months ago. His response: "The U.S. feels better.",
Like Caterpillar, Cutler said he thinks that "Armageddon" is off the table in Europe. He also said he thinks China, Brazil and other emerging markets took the right steps last year to slow their economies a bit to fight inflation.
That doesn't sound like conditions that would justify rates needing to remain near zero until 2014. If the Fed does sit tight until then, that will wind up being six years of historically low rates. That could create yet another asset bubble.
Rogers said he thinks the Fed is doing a good job given the numerous challenges facing the economy. But he conceded that the Fed probably should have only one mandate: Managing inflation through interest rates.
Sure, Ben Bernanke and the other Fed members who have found religion in the "communications tool" can talk until they are blue in the face about how interest rate forecasts are not set in stone. But that's bunk.
Maybe the Fed feels it needs to do everything it can to reassure the market it isn't asleep at the wheel and will step in when necessary to prevent future panics. Call it the ratings agency syndrome. After arguably waiting too long to act before the last recession, the Fed would rather now err on the side of caution to prove, like S&P and Moody's, that it has learned from prior mistakes.
But the market now expects no rate hikes until 2014. Anything before that would likely freak out investors. The Fed has boxed itself in, like it or not. It is showing everybody its hand ... before the cards have even been dealt.
"The Fed increased transparency but they did not provide greater clarity. They need to be data dependent. The interest rate projections cannot be guarantees," said Jeffrey Cleveland, senior economist at Payden & Rygel, a money management firm in Los Angeles.
Best of StockTwits. Netflix's Reed Hastings was on many lists as one of the best CEOs of 2010 (including Fortune's.) Hastings was also considered one of the worst CEOs of 2011 after the price hike/Qwikster/earnings warning debacles.
But with Netflix beating lowered forecasts Wednesday, Hastings could now be leading candidate for Comeback CEO of the Year. Netflix ( ) surged 22% Thursday and is now up 67% already in 2012. Still, many are skeptical.
That last comment is a bold, unfair charge. Hastings isn't "managing" earnings per se. But with so many investors short Netflix heading into the results, it does look like a squeeze is one reason the stock is up as much as it is Thursday.
The only thing these two have in common is they beat forecasts. Wall Street rewards companies that top expectations, even if, as was the case with Netflix, the expectations were fairly low.
But techs with quadruple digit PE ratios in 1999 did so well! Wait. Where's my Pets.com sock puppet? Oh. There it is lying next to my WebVan T-shirt!
Agreed. That's not good. But that's why Netflix is making a big bet on its own content. It may work. I am intrigued by the Kevin Spacey show and delighted to hear there will be a fourth season of "Arrested Development" exclusively on Netflix in 2013.
But not excited enough to think it is worth more than a $1 billion boost in market value today.
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
|What we want Apple to unveil at WWDC|
|Millennials squeezed out of buying a home|
|7 traits the rich have in common|
|Big Data knows you're sick, tired and depressed|
|Your car is a giant computer - and it can be hacked|
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.01%||4.03%|
|15 yr fixed||3.12%||2.97%|
|30 yr refi||4.04%||4.09%|
|15 yr refi||3.15%||3.05%|
Today's featured rates:
|Latest Report||Next Update|
|Home prices||Aug 28|
|Consumer confidence||Aug 28|
|Manufacturing (ISM)||Sept 4|
|Inflation (CPI)||Sept 14|
|Retail sales||Sept 14|