Monetary Policy Insights

Recently, there’s been a lot of chatter about monetary policy becoming “data-dependent.” Yet, in his remarks at Jackson Hole, Chair Powell seemed to steer clear of that phrase, emphasizing instead the focus on “current terms.”

It feels almost off to rely solely on data for our present and future policies. It’s like saying, “We’re not quite sure what we’re doing, but we’re moving ahead regardless.”

Economists and Fed watchers may disagree on specifics, but many accept Milton Friedman’s view that monetary policy operates with long and often unpredictable delays. Data, on the other hand, reflects what has already happened.

Now, consider if the Fed is waiting for clear signs that inflation is under control. Sure, the latest CPI data provides some insight, but that information is aged—it’s from last month. Plus, this data will get revised over time, potentially telling entirely different stories in the future.

Being data-dependent implies a search for consistent patterns, yet data is naturally messy, revisions included. The Fed usually requires several months of CPI data to ascertain a persistent pattern before making policy changes.

While data reveals history, effective monetary policy should express our predictions about what lies ahead. That’s where the Fed often seems to miss the mark. Firstly, the policy ought to come off as proactive, but Powell’s approach can feel somewhat reactive.

Secondly, sound monetary policy should be informed by what decision-makers expect will happen in the coming months once current policies take effect. However, the Fed’s embrace of data dependence reveals a lack of confidence in grasping economic dynamics. At least they have a perspective that feels somewhat grounded.

Think back to the era of “temporary inflation.” Remember how tariffs brought about renewed inflation and recession? Regardless of opinions on Trump’s tariffs, we are still feeling the effects—those dubious forecasts of inflation are just the latest in a line of Fed miscalculations.

To be fair, getting the monetary policy right is tricky. Financial markets are in constant flux. For instance, the implications of new currencies like Stubcoin on the financial system are still unclear.

Regardless of these challenges, it’s unsafe to steer monetary policy while gazing into the rearview mirror. The Fed Chair must develop a clear understanding of the economy and its inflation drivers. Based on this comprehension, they should devise policies that anticipate future conditions. Sure, mistakes will happen—predictions may be off—but having a proactive outlook is crucial.

This doesn’t mean data is worthless. Current information should shape expectations for upcoming developments that guide Fed policy decisions.

Trump often criticized Powell for being “too late,” and that criticism isn’t unfounded. Powell’s reliance on data, combined with a shaky understanding of economic trends, often leads to inevitable delays.

Choosing Powell’s successors will involve several factors, including Trump’s loyalty and their stance on independence along with their ability to balance low inflation and high employment.

While the questions raised are few and far between, it’s essential to determine candidates’ understanding of economic mechanisms. Anything less is largely irrelevant if they don’t grasp the underlying dynamics while the Fed remains tethered to data points.