Fed and Jerome Powell too dependent on data, analyst says

The problem isn’t that the data is bad; in fact, most of it seems to be trending in the right direction. It’s that the Fed relies too much on it to make its decisions, Tom Lee, managing partner of Fundstrat Global Advisors, told CNBC.

By doing so, Lee argued, the Fed delayed making the necessary decisions to reduce inflation — and the Fed risks repeating the same mistake again. “Now the soft landing turn is missing,” Lee said.

The odds of a soft landing are increasing, according to Lee, but they are not yet a sure thing. “(The key) is for the Fed to get off the reliance on data, because the reliance on data is why they missed the inflation tower,” he said.

Lee’s comments come in stark contrast to the Fed’s data-driven approach. Federal Reserve Chairman Jerome Powell has repeatedly said he won’t cut rates until he sees more “good data.”

Powell finally seems to be getting his wish. Federal Reserve officials “said that recent data increased their confidence that inflation is moving sustainably toward 2 percent,” according to minutes from the Fed’s last meeting released Wednesday.

However, the Fed hasn’t always been so focused on data. In fact, the idea that it should be is relatively new in the Fed’s history, starting only in the mid-2010s. Essentially, it means that the Fed is not committing to a particular course of action when it comes to cutting interest rates and lowering inflation. Instead, it makes its decisions based on specific market indicators that indicate that prices are actually falling. In the past, the Fed has sometimes made interest rate decisions based on a predetermined timetable. For example, in August 2011, he openly stated that he expected interest rates to remain at zero percent until “at least mid-2013.”

Critics say the Fed’s data-dependent approach means it sometimes gets behind the curve as it waits for the data to come in rather than anticipating where the economy is headed. They also say that relying too much on data is not helpful if the data gives mixed signals. This has been especially prevalent over the past year, where inflation has continued to rise, but consumers have continued to spend, when the opposite is usually the case during periods of high prices. (That being said, consumers are becoming more frugal now than they were at the beginning of the year.)

Data addiction done right requires looking at everything while recognizing and separating the important parts from the distractions, according to James Bullard, former president of the Federal Reserve Bank of St. Louis.

“Every observation on the economy (for example, a GDP report or an employment report) contains a certain amount of signal and a certain amount of noise,” wrote Bullard, an advocate of data reliance, in -a blog post from 2016. “The art of policymaking involves separating the signal from the noise.”

The need for the Fed to keep its precise finger on the pulse is critical right now, with the economy teetering on a knife’s edge between a miraculous soft landing and a recession. For the better part of two years, the Fed managed to reduce inflation without causing a recession and rising unemployment. But now, if they miss the right time for a rate cut, all that work could be lost. Right now, economists and investors believe an interest rate cut in September is almost certain – and a second is likely before the end of the year.

Lee is already thinking about further cuts. “Cutting more aggressively would actually make sense, at least from a market perspective,” he said.

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