econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 27 February 2016

What Does Data Dependence Mean?

from the St Louis Fed

-- this post authored by James Bullard

The Federal Open Market Committee (FOMC) has emphasized that decisions regarding the normalization of monetary policy will be data-dependent. Data dependency is sometimes misinterpreted as meaning decisions are based on the data released just before an FOMC meeting. That interpretation is far too narrow and inconsistent with good monetary policymaking. Rather, the decisions should be based not only on the current dynamics in the data but also on longer-run trends and expectations for data going forward.

Data are often revised, sometimes significantly. For example, payroll employment increased in August 2014 by an initial estimate of 142,000 compared with the current estimate of 213,000.[1] Knowing that revisions are possible, monetary policymakers must strike a balance between not wanting to react too much to day-to-day observations on the economy versus wanting to react sufficiently to changes in underlying macroeconomic conditions. Every observation on the economy (e.g., a GDP report or an employment report) contains a certain amount of signal and a certain amount of noise. The art of policymaking includes separating the signal from the noise.

Weather is a factor that at times can increase the size of noise relative to the signal for economic data. In such cases, monetary policymakers might want to temper their reaction to specific data. Consider the case of real gross domestic product early last year, when weather was thought to have disrupted economic activity. According to the most recent estimate, real GDP in the first quarter of 2015 grew at an annualized rate of 0.6 percent - higher than the initial and follow-on estimates of 0.2 percent, - 0.7 percent and - 0.2 percent. The FOMC did not make any appreciable adjustments to policy in response to those GDP reports. As this example illustrates, data dependence does not mean necessarily that a particular number or even a sequence of numbers is going to change the course of policy.

Monetary policy decisions must be made with an eye toward the future. It is well-known that monetary policy operates with long and variable lags. Accordingly, the monetary policymaker must incorporate forecasted future outcomes when making current monetary policy decisions. Although macroeconomic forecasts are changed in response to new data, the changes tend to depend on whether a particular piece of data was expected and how important it is relative to other pieces of data. Given that the contours of forecasts do not change very quickly, monetary policy strategy also does not change very quickly. However, both probably would change in response to an ongoing slew of worse-than-expected or better-than-expected data.

The FOMC effectively deviated from data-dependent decision-making when it introduced calendar-based forward guidance in August 2011. The committee gave a specific calendar date for how long the zero interest rate policy, which had been in place since December 2008, was expected to continue ("at least through mid-2013").[2] At subsequent meetings, the committee extended the date. Throughout that period, I argued that the guidance should be dependent on the state of the economy rather than on a calendar date. The FOMC moved to data-dependent forward guidance in December 2012, when it replaced the calendar date with the so-called thresholds for inflation (2.5 percent) and unemployment (6.5 percent).[3] In March 2014, the FOMC discarded the thresholds because unemployment approached 6.5 percent. However, language about being data-dependent remained in the statement.

During the 2004-2006 normalization cycle, the FOMC raised the policy rate by 0.25 percentage points per meeting for 17 consecutive meetings. Arguably, monetary policy during that era was insufficiently attentive to incoming macroeconomic data. Possibly, the recent emphasis on data dependence will usher in a period of monetary policymaking more akin to the 1980s, 1990s and the early 2000s, when the policy rate was adjusted in response to current macroeconomic data, longer-run trends and forecasts, but not in a fashion that was overly reactive to only the latest data or noisy aspects of macroeconomic developments.

Source

https://www.stlouisfed.org/publications/regional-economist/january-2016/what-does-data-dependence-mean

Endnotes

  1. Numbers were obtained from ALFRED, the St. Louis Fed's archival economic database. See also Kevin Kliesen, "August Nonfarm Payroll Numbers Lower than Forecasted? Wait for the Revisions." St. Louis Fed On the Economy blog post on Sept. 4, 2015, at www.stlouisfed.org/on-the-economy/2015/september/august-nonfarm-payroll-numbers-down-revisions.

  2. See the FOMC statement on Aug. 9, 2011, at www.federalreserve.gov/ newsevents/press/monetary/ 20110809a.htm.

  3. That is, the zero interest rate policy was expected to continue at least as long as unemployment was above its threshold and inflation was at or below its threshold. For a discussion of some issues related to thresholds, see my presentation on Jan. 10, 2013, "The Fed's New Regime and the 2013 Outlook," at www.stlouisfed.org/~/media/Files/ PDFs/Bullard/ remarks/BullardWisconsinForecastLuncheon10Jan2013final.pdf.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Theory of the Monetary Circuit: A Critique
The Expected Effects of Petitions to Improve the Monetary System
News Blog
This Mushroom Starts Killing You Before You Even Realize It
August 2016 Median Household Income Has Declined From The Beginning Of The Year
August 2016 Pending Home Sales Index Declines?
24 September 2016 Initial Unemployment Claims: Rolling Averages Continue to Improve.
Third Estimate 2Q2016 GDP Revised Upward. Corporate Profits Down.
The Terrorist Networks At Our Fingertips
Infographic Of The Day: Dubai Interesting Statistics And Facts
Early Headlines: Asia Stocks Up, Oil Surges, OPEC Cuts Production, Student Loan Woes Mount, Trump Still Close, Aleppo Hospitals Bombed, Huge Wind Storm In Oz And More
The World's Most Sustainable Cities
Big Sam In Bad Company
Other Ways To Spend Your AirPod Budget
Crashing Space Station Shows Why China Must Start To Collaborate In Orbit
NFL Edges Towards A Full House In London
Investing Blog
Will Deutsche Bank Survive?
Banks Of Absurdity
Opinion Blog
The Federal Reserve Note
Trump, Trade And Taxes
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
29Sep2016 Market Update: WTI Crude Rises Into 48 Handle, Goldman Sticks To Lower Crude Prices In The Future, US Dollar Volatile Reflecting On Future Market Movements, Gold Moving Higher Signaling Weakening US Market
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved