Founders Note: The Fed Loves Stale Data

Jan 2

Today:

1. China and Herd immunity

2. 2023 outlook. Very good macro perspective**

3. Japan’s Yield Curve Control

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Comment: Bureaucracy Loves Stale Data

We read this today in a ZH post entitled: 2023 Outlook: Pain

We had several non-traditional factors that drove inflation, many of which are gone. Using responses that worked for “traditional” inflation when we have a unique fact set this time around is going to lead to large and difficult policy mistakes.

• Rise and Fall of Inflation Risk Factors which examines the roles of the Fed, Stimulus, Supply Chains, War, and “Disruption” on inflation.

• 2 + 2 = 5 explores why the Fed seems to be looking at data very “weirdly” and the problems that these views are likely to cause.

• The last piece in this series, the Path to Q1 Deflation, lays out how this comes together to shock the system (deflation is not healthy when it is caused by an economy hitting a wall).

We thought a comment in the “2+2= 5 Section” in that story was insightful.

The Fed should be taking a victory lap and figuring out how to avert a hard landing, but for some reason they insist on looking at old data (12 months, rather than data impacted by their actions), stale data (OER), and pollyannish data (the selective use of some jobs data) to signal that they want a higher terminal rate!

This reminded us that Team Transitory was also data dependent. The Fed ignored the signs inflation was coming on the way up, choosing instead to wait for the actual data to give it cover.. which resulted in tightening way too late.

Now it seems they are ignoring equally lagging/stale data on the way down if Academy Securities is right. So basically they could be making the same mistake again. If they are in error we know exactly why…

Job security.

Bureaucrats always need data to be their alibi for action. *Always*. Because when they stray from it and use intuition or anticipatory behavior, they run into too much subjectivity. It’s actually a disciplined ( but one dimensional) approach. Why do they do this? They ro it to avoid the sin of subjectivity in a supposedly objective hard science. Data gives the institution cover for their (in)action.

Plus in the group dynamic, without a data basis, we believe there would be much more disagreement in ranks on what policy to use. The dot plot would be all over the place. That’s why they are “data dependent”. Data is therefore their supervisor.

Powell’s response was in short order: 1) They followed the text book rules, 2) We were surprised by unprecedented supply chain issues, 3) We were right in principle LINK

Safety in Numbers

Tethering decisions to the data keeps then on the same page. Remember Powell said We went by the textbook ( video clip here) when they screwed up on inflation before. The “textbook” is the alibi/scapegoat when possible.

So, either inflation is way worse than they say, or they are using the data concept as cover again for delaying action to be consistent in their error potential. One thing we are quite certain of, in a stressful situation, bureaucrats seek cover. Group think is rewarded and individuality is punished.. until the crisis explodes

If it is the latter, they will keep doing it until something literally breaks or data changes. Therefore it is a race for breakage versus data confirming inflation is low enough. That when we get the panic pivot. Unless Yellen keeps backdoors fiscal relief first.

So.. when you hear them say “data dependent” think…. we don’t know and we’re going to blame the textbook if the data is late. It gives politicians a sense of calm and further reassures listeners that economics is a hard science. But we all know better.