Matthew Klein at Bloomberg is out with an insightful piece on the folly of the Bernanke Fed’s obsession with “the data.” As we’ve pointed out regularly on this site and in our monthly strategy reports, the Fed is implementing emergency monetary policy using signals from economic data that is 1.) a poor predictor of future economic growth and 2.) regularly revised. Klein summaries a new paper that lays out in detail large distortions in the monthly jobs data.
This is silly, but it wouldn’t matter except for two recent developments. First, the Fed has become hypersensitive to monthly jobs data. Second, the process by which the BLS smooths out its raw data seems to have been corrupted by a statistical artifact. As Wright explains, the job losses associated with the Great Recession were concentrated at the end of 2008 and the beginning of 2009 — the coldest months of the year. That distorted the BLS’s seasonal adjustment algorithm, which uses the past three years of data to determine the “normal” pattern of employment growth in different months….
The big takeaway is job growth since the trough has been steady and slow. This has some surprising implications for Fed policy. It isn’t in Wright’s paper, but during the conference he presented another slide showing his chart of seasonal distortions with the start and stop dates of the Fed’s asset purchase programs added on top. It turns out that the Fed stops buying assets after a few months of good job data only to restart buying once job growth slows, even though a proper measure of employment would show no acceleration or deceleration in job growth. In other words, the Fed has been reacting to meaningless data.
Jeremy Jones, CFA
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