The hubris of the Bernanke Fed is more astonishing with each passing day. As The Wall Street Journal reports:
Fed officials on Thursday echoed their colleagues’ remarks earlier this week that investors misunderstood if they thought Mr. Bernanke’s remarks reflected a change in policy, or the likelihood that the Fed would curb its bond purchases even if the economy flagged. The bond purchases are aimed at boosting the economy by pushing down long-term interest rates and pushing up asset prices in hopes of spurring hiring, spending and investment.
Mr. Lockhart, speaking Thursday in Marietta, Ga., said investors reacted quickly after Mr. Bernanke’s comments without completely comprehending what he was saying. Fed officials are trying to communicate a complex plan, “and it takes some time to understand,” he said. The return of some level of market calm suggests market participants are getting the message about the Fed outlook, he said.
It is as if the Fed believes that the millions of informed investors with real money on the line are too stupid to figure out what the Fed Chairman told them last week. Bernanke was crystal clear. The path of future monetary policy is data dependent. The Fed is ostensibly operating under the wrongheaded belief that it is only their economic forecast that matters. Bernanke & Co. don’t seem to grasp that the market might have a more bullish growth forecast or more likely a wider range of outcomes for growth than the Fed.
Maybe the Fed’s real problem is that it is setting policy based on real-time economic data that is often revised substantially. As Samuel Rines points out in an op-ed this morning, basing policy on faulty data can lead to mistakes.
This matters. The Federal Reserve uses GDP and other data such as employment and hiring to determine if the economy is overheating or cooling off and to make policy based on this data. The uncertainty of the initial data makes Fed policy decisions all the more difficult. Large, unanticipated revisions of key numbers can dramatically change what should have been done, and the assessment of how well it worked.
In February 2013, initial employment data pointed to a net growth of 236,000 new jobs. This was revised to 268,000 in March and then to 332,000 in April. From the first estimate to the last, the number shot up 41%.
That is not uncommon. Last November, the first official estimate indicated that employment increased by 146,000. By the third revision the number was 247,000—a 68% change. Since the beginning of 2012, the mean absolute revision to the change in monthly employment is about 45,000 (plus or minus), 30.4% of the initially reported numbers.
Jeremy Jones, CFA
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