The Fed has repeatedly said that they are “data dependent”. Historically, many have assumed “data” to be defined as backward-looking economic data (i.e. GDP growth, unemployment rate, inflation, retail sales, etc.) and forward-looking economic indicators (i.e. consumer confidence, housing starts, small business confidence, etc.). The somewhat esoteric stuff that academics and economists get excited about.
As the data continues to come in, it seems increasingly disconnected from the Fed’s recent “need to ease” mantra. Yesterday, retail sales surprised to the upside (0.4% vs. 0.1% expected) and bank CEOs indicated that the consumer remains strong fueled largely by record unemployment, higher wages, and low borrowing rates. While it’s true that manufacturing data has been disappointing, remember, the US is an overwhelmingly consumer-driven, service-based economy – accounting for roughly 70% of economic activity by some measures.
So, this what faces the Fed in a few weeks – solid economic data for the largest part of the economy, a powerful consumer, and a record stock market — hardly the circumstances that clearly cry out for Fed action. Typically, the Fed waits to see the “whites of [the recession’s] eyes” before taking action – often being accused of waiting too long. And yet, while a pre-emptive Fed is rare in historical terms, it is increasingly common in this post-financial crisis world of central-bank first policy.
Increasingly, the Fed has massaged its language to create a narrative to fit market expectations, focusing on boogeymen like inverted yield curves. Implicit in this pivot is the assumption that the “wisdom of the crowd” has informational value comparable to traditional economic measures. The Fed has recently said as much indicating that the bond market is sending a message that they might be missing in the traditional data.
Admittedly, by traditional measures, we think inflation seems very tame. Certainly that seems to give the Fed plenty of room to maneuver, doesn’t it? As people who live in the real world, we continue to be perplexed by this. As we consider all of the things that we purchase or invest in on a daily basis (homes, college, autos, gasoline, etc.), it certainly seems like things cost more. Except for the cost of money, that is.
Perhaps the Fed should not be struggling in vain to maintain a 2% inflation target and instead focus on simply maintaining price stability.
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