Although Federal Reserve Chairman Powell has repeatedly emphasized over the past few months that the Fed's interest rate decisions will be based on the analysis of the latest US economic data at every meeting, in the past month, US economic data has been highly volatile. Media reports have made many market participants unhappy, believing that the Fed is unable to make a clear macroeconomic judgment.

Powell said at the FOMC press conference in September, “The actual actions we take will depend on how the economy evolves.”

Analysts believe that although this sounds reasonable, in the world of monetary policy, this kind of practice is quite unusual. Central banks do always keep an eye on the latest economic information, and in short periods of uncertainty, they rely on this information to guide policy.

However, the media said that the Fed's long-term reliance on this approach has made some investors and economists dissatisfied. They think it is time for Powell to express more confidence in the economic expectations for the next year or so, which will help the public to better understand the direction of the Federal Reserve's policy. As US inflation gradually cools down, investors criticizing Powell want him to give a coherent and forward-looking narrative and discuss the risks and issues associated with this outlook.

MetLife Investment Management strategist Drew Matus said that the quality of economic data has declined, and most of the data is lagging behind. Furthermore, data revisions may reverse previous assumptions about the health and direction of the economy.

“The heavy reliance on data has led to more volatility.”

“It's not a good way to make policies.”

Relying too much on data or causing the Federal Reserve to lose ground

Analysts believe that the trend of the US economy after the pandemic often moved in a direction not anticipated by analysts.

For example, in 2021, the Federal Reserve considered the surge in inflation to be “temporary,” but inflation did not fall below 3% until November 2023. After the banking turmoil in early 2023, practitioners predicted a recession, but the economy grew by nearly 3% that year.

However, decades of research have shown that monetary policy plays a role not only through setting interest rates, but also through market participants and the public's expectations of interest rate trends over the next year or so, and it is essential to make what kind of predictions. Instead, focusing too much on the next few data reports will keep investors stuck in a six-week policy cycle.

Andrew Levin, a professor at Dartmouth College and a former Federal Reserve economist, said

“Every monetary economist knows that monetary policy works through the entire interest rate term structure, not just the current setting of the federal funds rate. The central bank needs to clearly explain how to adjust the path of the federal funds rate if its benchmark predictions prove wrong.”

Analysts believe that several recent US labor market reports illustrate the risk of being closely dependent on data. For example, employment data for July and August were clearly weak, so the Federal Reserve, under Powell's leadership, began an easing policy by drastically cutting interest rates by 50 basis points.

However, employment growth rebounded in September, and the data for July and August were revised upward. The summer weakness seems to have disappeared, which has also reduced traders betting on another sharp cut in interest rates. Some economists are beginning to question whether the Federal Reserve is acting too hastily.

Economist: The Federal Reserve should make forward-looking expectations

In his opening speech at the press conference after the September meeting, Powell expressed many opinions on the current economic situation and described how the Federal Reserve is dealing with certain risks, but he did not talk too much about the medium-term outlook.

EY chief economist Gregory Daco said that Powell's style favors “open choices” rather than skeptical predictions, which is somewhat unusual. “He was very candid” to discuss the evolution of the economy, Dako said. However, “a forward-looking view would be more useful.”

Former Federal Reserve Chairman Ben Bernanke also believes that forecasting is important because it allows the public and financial markets to understand why central banks are responding to new data in this way.

Bernanke, who currently works at the Brookings Institution, wrote when evaluating the Bank of England's expected approach this year:

“The central bank regularly publishes economic forecasts with multiple communication functions, providing a wide range of reasons for policy decisions and helping to align private economic decisions and broader financial conditions with the central bank's views. This can make policies more effective in driving the economy in the desired direction.”

Claudia Sahm, chief economist at New Century Advisors, also said that an economic forecast with a clear and structured narrative can also help policy makers discuss the risks ahead.

“Here, the compactness of the narrative can help, and if the benchmark scenario isn't fully anticipated, then the risks aren't fully discussed.”

This article was transferred from Wall Street News, by Zhao Yuhe, Zhitong Finance Editor: Li Cheng