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Is The Fed Too Data-Dependent?

November 03, 2022

Our last blog discussed the projections from the International Monetary Fund (IMF).  They are published twice a year. There is no shortage of forecasts nor ideas of what should and should not be done to reduce inflation.

We listen to Dr. David Kelly, chief global strategist for JP Morgan on a regular basis. He always has an opinion and he has a knack for articulating ideas that make it easy to share with our audience.

In his weekly podcast on October 10, 2022, he identifies the many times the Federal Open Market Committee (FOMC) says they are dependent on data. However, Kelly postulates that they are not looking beyond the numbers.

In essence, when you look at the economy, some measurements are what are called leading economic indicators that might predict the future of the economy. Conversely, there are lagging economic indicators.

Lagging indicators take time to work through the economy. Both monetary policy (e.g., raising interest rates) and fiscal policy (e.g., pandemic checks to consumers) are lagging indicators. It takes a while to work through the different parts of the economy to see results.

Looking at the month-to-month numbers without allowing for the lag time in Kelly’s opinion is a mistake the Fed is making. Kelly said historically, the Fed tends to wait too long to take action and then they over-react doing too much to the detriment of the normal business cycle.

We have written on several occasions our opinion that the Fed should have started raising rates in 2021 which would have allowed a more gradual interest rate increases with less disruption. As an analogy, it is a steadier bike ride to go up a hill with a gradual incline and the same coming down as opposed to a shorter, steeper uphill and downhill.

Kelly believes the Fed is making the same mistake again. He believes this will make life for the American family more difficult than necessary.

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