Federal Reserve Chairman Jerome Powell on Wednesday echoed a refrain he's been repeating for some time: “Central banks want to see more data.”more good data. The data is good enough to give the Fed confidence that inflation is under control and that it can start cutting interest rates.
But Powell and his colleagues constantly monitor a variety of data sources.
So what kind of data is the Fed focused on? And how has its data diet changed in recent years?
The Fed considers much more than monthly inflation statistics and other important government reports.
“I like to call the Federal Reserve a Hoover data vacuum,” said Claudia Sahm, founder of Sahm Consulting and former Federal Reserve economist.
He said the vacuum also sucks non-governmental data from banks, payment processors and research firms. The Fed also collects its own data on factory output and consumer credit.
Sahm said when she started working at the Fed, all of that data was pretty overwhelming.
“And I said to the senior who was trying to train me, 'What do I do with all these numbers?' And she looked at me and said, 'Just breathe it all in.'” Sahm remembered.
Sahm said the Fed is good at spotting patterns in numbers and recognizing whether those patterns are just noise or indicate meaningful trends.
He also said that while the Fed places the most weight on official government reports, many of these other data sources can be considered to add nuance.
“The unemployment rate is low, but what about the employment rate? Or what are the area codes looking at?” she said.
Certain private sector data also allows the Fed to get a faster read on economic conditions.
Eric Swanson, an economics professor at the University of California, Irvine, said that early in the pandemic, when the situation was rapidly changing, the Fed released online rent prices, anonymized cell phone location data, and credit card transaction data. He said he investigated.
“This is because consumer spending data is released at the end of the following month, whereas credit card transaction data can be released within a day or two,” he said.
But now that things have calmed down, the Fed is keeping a close eye on parts of the economy. It's still too hot.
Tim Duy of SGH Macro Advisors said this includes job openings.
“It's not that we haven't tracked that data in the past, it's not that we haven't considered it important, but as things change, that data can take on new life,” he said.
In other words, as the economy evolves, so too will the Fed's data diet.
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