One phrase heard repeatedly in recent years is that monetary policy will be “data dependent.” In his Jackson Hole remarks, Chair Powell seems to have avoided the phrase while repeatedly emphasizing its contents with references to “current conditions.”
Data dependent means policy is almost certainly inappropriate to current and future conditions. It’s another way of saying, “we don’t know what we’re doing, but we’re doing it anyway.”
Fed policy watchers agree on little, but they generally embrace Milton Friedman’s dictum that monetary policy works with long and variable lags. In contrast, data tell us what happened in the past.
Suppose the Fed waits for clear signs inflation is under control. The latest CPI release may say it is, but that was last month. Further, the data get revised, so maybe the revisions next month and the month after will tell a different story.
Data dependent means looking for a sustained pattern. The data is naturally noisy even without revisions. A sustained pattern requires multiple months of comforting CPI data before the Fed can adjust policy.
Data tell us history while sound and deliberate monetary policy reflects a view about the future. Therein lies the two-valved heart of the Fed’s repeated failings. The first is that while monetary policy should be forward looking, Powell’s Fed is always backward looking.
Second, sound and deliberate monetary policy should reflect what policymakers believe is likely to happen months from now, when current policy’s effects will manifest. In fact, as their data dependency confirms, Powell & Co. have little confidence in their understanding of the economy. In that, at least, their perspective is on solid ground.
Remember “temporary inflation?” Remember how tariffs would trigger renewed inflation and recession? Whatever one thinks of Trump’s tariffs, we’re still waiting on those dastardly harmful effects, and we’ll likely still be waiting at the end of Trump’s term. Those false predictions of temporary inflation and inflationary tariffs are just the latest examples of the Fed’s analytic mistakes.
To be fair, getting monetary policy right isn’t easy. Financial markets evolve constantly. For example, no one knows what stablecoins will do to the financial plumbing through which monetary policy flows.
Difficult or not, no one can drive the monetary policy bus safely while looking in the rearview mirror. The Fed Chair should have a clear and well-defined view on how the economy operates and, especially, what drives inflation. Then, based on that understanding and its implications for the future the Fed should set policy on its view of the road ahead. It may be wildly wrong, either because of intervening events or a poor understanding of economic dynamics, but the only chance of being right except by raw luck is to be forward looking.
Does that mean the data are irrelevant? Not at all. Current data should help inform expectations about future developments which ought to drive Fed policy.
President Trump has often berated Powell for being “too late.” It’s a fair critique. Powell can hardly avoid being late as he suffers from both data dependency and a poor understanding of economic dynamics.
Many factors will go into installing a Powell successor. Right or wrong, Trump loyalty will be one of them. Another will be Fed independence and the nominee’s views on the dual mandate of low inflation and high employment.
The question asked too little but demanding a thorough examination is the nominee’s views on how the economy really operates. All the rest means little if the candidate’s understanding of economic dynamics is poor, leaving the Fed hanging on a data point.
JD Foster is the former chief economist at the Office of Management and Budget and former chief economist and senior vice president at the U.S. Chamber of Commerce. He now resides in relative freedom in the hills of Idaho.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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