The Fed's Holmes-Moriarty Problem

a | A

Every time I get to the part in the Federal Reserve minutes where the results of the New York Fed's primary dealer survey are discussed, I chuckle.

From the minutes of the March 19-20 meeting, released today:

"Results from the Desk's survey of primary dealers conducted prior to the March meeting showed that dealers continued to view the third quarter of 2015 as the most likely time of the first increase in the target federal funds rate."

Now let's turn to the Fed's Summary of Economic Projections, released on March 20 at the conclusion of the meeting. Lo and behold, we find that 13 of the 19 policy makers thought the first increase in the Fed funds rate would occur in . . . 2015!

Who's leading whom here? This is what's known in economics as a "Holmes-Moriarty Problem," and it shows the pitfalls of interdependent decision-making.

In Sir Arthur Conan Doyle's story, "The Final Problem," Sherlock Holmes departs London by train, pursued by his archenemy, Professor James Moriarty. Holmes has to decide at which station to get off. Moriarty is trying to figure out where Holmes will get off. Holmes has to determine what Moriarty thinks Holmes will do. And so on.

It's a classic case of you think that I think that you think, which ends up helping neither party. If the Fed is looking for some meaningful input, it should think about surveying a group that isn't merely reflecting back what it gets from the Fed.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.