Facts, data dependency, and opinions

Facts, data dependency, and opinions

Today, I listened to Janet Yellen’s Q&S session as I have done every time since she took over the role of Chairman (Chairperson) of the FOMC. As we know, the FOMC conducts monetary policy for the United States. One of their powers is to set the Fed Funds Rate and this has been front and center in the minds of many people. If you have turned on CNBC during U.S. stock market hours during the past several months, it was very likely that you would hear a lot about “liftoff” which means the first Fed Funds increase since 2007. If you listened to CNBC or any other business news channel it has been in such focus. A common topic discussion is will they or won’t they raise rates. If you listened longer, you will have noticed that one “expert” would say they will raise rates and a few minutes later another “expect” would say they won’t raise rates. Then they talk about whether they should or shouldn’t raise rates. We have to remember that all of these things are just opinions. More on opinions later.

If you have watched Janet in her Q&A sessions, you may have noticed that the FOMC has 2 primary objectives: 1) provide conditions for maximum employment, and 2) make sure that inflation is around 2%. Now maximum employment and the inflation are related so it can be a balancing act to achieve maximum employment without inflation in the optimal range. If inflation is too high it is bad and if inflation is too low (deflation if inflation is below zero) it is also bad. If employment is too high then the will be pressure to increase wages which is a cause of inflation. If inflation is too high the economy can become unstable which leads business to cut back which lowers employment. The effects are not immediate so the Fed has to be careful not to overshoot or undershoot in its policy decisions.

So, in essence, what the Fed does is monitor the economic conditions and through its policy decisions steer the economy toward maximum employment and the optimal inflation range. How does the Fed decide what to do? Yellen has been very clear about this and she has been consistent in her explanations. The main thing to remember is that the Fed monitors a large amount of data that is coming in continuously. Based on this data, the FOMC members (there are 12 of them) individually assess the state of the economy. There’s a lot of data coming in that helps them judge the state of economic growth, inflation, wage growth, employment, imports, exports, etc. So there’s not just one thing that they look at. Each member will form an overall opinion about the data and then the group discusses the data. They are data dependent. This means that decisions are not predetermined and FOMC decisions depend on the data available at the time of the meeting. So any “expert” who says the Fed will or should rate rates or lower rates three months from now really nothing about what will happen. Their decision will be based, in part, on what the data between now and the next meeting turns out to be. Since the Fed as consistently said that the employment is pretty much where it is and inflation is still too low, we can say that if employment data indicates that employment is staying the same or continuing to improve and if inflation is heading back up towards 2% then the Fed will likely move higher on rates. One aspect of the economy is imports and exports that are influenced by the exchange rates of the U.S. dollar relative to our trading partners. If Fed raises rates then the dollar will increase in value because more capital will be attracted into USDs because of the better yields. A higher dollar will have a downward pressure on inflation because it will make commodities less expensive in the U.S. that will reduce costs for individuals and businesses in the U.S. Lower inflation is the opposite of what the Fed wants at the moment. A stronger dollar will also lower U.S. exports because it will make U.S. goods more expensive for people whose currency is weakened relative to the USD. While this is a positive for U.S. people who are vacationing overseas, it also lowers U.S. economic growth. A third consequence of a strong USD is that emerging markets such as Brazil are harmed by a stronger dollar at a time when emerging market economies are struggling; if emerging markets (including China) weaken the global economy weakens and the U.S. economy is also affected. Although the exchange rate is not is direct factor in Fed policy (employment and inflation targets are), the Fed does consider this as part of the data that influences growth and thus inflation and employment. Since emerging market economies would suffer from a stronger dollar, the IMF has publicly stated that the Fed should not raise interest rates at this time.

So to summarize, the Fed is data dependent meaning it relies on known facts. Lots of people have opinions about what will happen and what should happen. As an investor, you should examine facts yourself and form your own opinions. I find it helpful to focus primarily on the performance of the handful of companies in which I am invested. I try to take in the facts, analyze the situation, and form my own analysis and likely range of future outcomes for my companies. The macro information plays some role in my analysis but it is minor compared to the information that I collect about my companies and their direct environment. When you understand your companies well, you will become less susceptible to both market volatility and other people’s opinions. Remember, form your own opinions from the facts (just as the Fed makes choices based on the data) and make decisions based on facts and your analysis of the facts.



Chris, what a great discussion. That should become a MF Post of the Day!

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Chris, a couple of comments (from a noneconomist, amateur opinion-giver)

Now maximum employment and the inflation are related …

I believe that this and many other topics related to interest rates may be less directly true than in the past. Yes, I am saying “this time it is different”. I am not saying that it is 100% different, but somewhat so.

For example, even though the US economy is not nearly as tightly connected with external trade as are some economies around the world, our economy and much more so “our” large corporations are far more inter-related with other economies than ever before. And semi-separate from that, since the US dollar is still the currency of international trade, because interest rates affect the value of the dollar, its effects ripple worldwide, and that can have implications in both directions (i.e., it can potentially backfire against us).

And this trend will almost certainly likely continue. IMHO, this means that the caution displayed this time will likely (should?) become the norm for many years into the future. Like it or not, the Fed is not just our Fed, its actions can have huge impacts on economies around the entire world.

[I have some other opinions about structural issues within our own economy that aren’t being measured nowadays in a way that is fully comparable with those same measures as in the past, but that would distract from my central point, which is a nonpolitical one.]

Thus, for all of the discussion about “data” (and I don’t disagree with most that I’ve heard and read over the past month, just the interpretations of it that some people have given), the policy (political?) implications of the Fed’s decisions will likely (continue to?) strongly take into account non-data elements. The justification may be data, but the basis of the decision, IMHO, will be much less so.

In this particular instance, I believe that the policy/political risk of making a change outweighed the risk of not doing so. Looking back on past actions/inactions from as far back as the 30s, even though current interest rates are below where the minimum “should” be, without any significant hint of widespread inflation in the near term (some argue that we may be facing the opposite, in part because of the already strong dollar), the other Fed mandate re employment may not be very relevant to many Fed decision-makers (but note that the Fed may be divided on this topic at historic levels, according to what I heard third-hand from a Fed historian).

as always, i am full of carp


Very good discussion. However, I’m curious about this statement:

A third consequence of a strong USD is that emerging markets such as Brazil are harmed .

Wouldn’t a stronger dollar mean the goods Brazil produces would get cheaper (dollar has more buying power), and be cheap in comparison to US goods, meaning that people would buy Brazil’s goods instead of goods from the US? That seems good for Brazil.

Interested in your thoughts.

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Wouldn’t a stronger dollar mean the goods Brazil produces would get cheaper (dollar has more buying power), and be cheap in comparison to US goods, meaning that people would buy Brazil’s goods instead of goods from the US? That seems good for Brazil.

Interested in your thoughts.

I’m not an economist, this is how I understand it.

A stronger USD will make the Real weaker. Yes, a weaker dollar will make Brazilian exports cheaper to those who buy those goods in dollars, but, actually, the US has a trade surplus with Brazil:


This means that a weaker Real will have a net negative effect on trade with the U.S. The exchange rate between the Real and other currencies will be unaffected by a stronger USD.

Brazil exports a lot of commodities. An important aspect of a commodity is that there is no differentiation from one supplier to the next. This means there will be no increased demand for Brazilian commodities from buyers who use USDs.

A second effect of a stronger USD is that increased demand for USD (due to the higher interest rate) will suck investment out of Brazil.



Wouldn’t a stronger dollar mean the goods Brazil produces would get cheaper (dollar has more buying power), and be cheap in comparison to US goods, meaning that people would buy Brazil’s goods instead of goods from the US? That seems good for Brazil.

Adding to what Chris said, currency markets can move far faster than an economy’s ability to adjust its factories. As an example, my Colombian fiancee needs to replace her washing machine and vacuum cleaner. She bought her old washing machine many years ago, a Whirlpool that was assembled in Colombia. Without looking into it, I’m going to guess that those are no longer assembled there, and probably haven’t been for many years.

Her vacuum was an import, and within the past year, the price of imports have risen sharply in Colombia. Even though she will likely buy a Korean or Japanese product, their prices are denominated in US dollars, and so the prices have shot up in the past year. Now although I don’t fully understand why, it seems to be the case. So even though the fall in the Colombian peso should be largely offset by the drop in the currency of the originating product’s country, international trade seems to be more complex than that. [Also note that China’s semi-fixed peg to the US dollar has enforced that even more.]

… and I don’t expect to see factory production in Colombia dramatically picking up over the coming months … some things a little bit maybe, but enough to compensate for the huge currency changes, not in the least. BTW, note that two of Colombia’s main exports, coffee and petroleum, are commodities that trade on international markets and are trade in US dollars. Their prices have collapsed as the US dollar has surged, so there has been no benefit to the local producers in terms of the local currency, as far as I can guess (being too lazy to do the research and calculations right now).

as always, i am full of carp

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the trouble with being “Data Dependent” is that you are depending on three things

1)Good data - or better yet excellent hard up to date data. But as the frequent revisions show that is not the case. Not to mention that the definitions and collection of data may or may not be themselves flawed .

  1. Proper and correct knowledge of what to do based on the data. IOW your assumptions and theory better be right. That is very hard to do in a field which mostly depends on observation, and doesn’t even come close to following the scientific method.

3)Results that follow precisely from the other two being implemented in the past have resulted in few if any mistakes

IMHO , the Fed mostly flunks these tests.

Add to that the assumption being made that those in power in the Fed are actually following the mandates of the law, not some agenda of their own. Certainly this is not unknown in other agencies of government.

Ultimately the Fed is a creature of Congress who can alter it any way they want. Or in today’s world where congress has given up lawmaking (bound to make somebody mad) to regulatory agencies and the President, maybe to them. But to politicians in any case.

It would be a leap of faith for me to believe Fed members are selfless, never look out for themselves first of all, never become captives to emotion based beliefs, never follow a deeply flawed path blazed by some long dead economist,never bend to the Political Correctness winds of the time, etc.

IOW they are human. And forced to work in a profession weak on real science, surrounded by politicians .

So don’t expect perfection. In fact they may be only slightly advanced beyond the Oracle of Delphi.

Given the circumstances, the Fed action (or rather lack of action) seems to be decent policy. But the longer interest rates are artificially suppressed , the worse the “unintended” (even if sometimes easily foreseen ) side effects will accumulate. Since they are indeed human , Fed members may be less concerned about bad future results as long as they happen on somebody else’s watch.

I won’t even bother to post links about mistakes the Fed has made (some near catastrophic) or those that other central banks have made in the past. Use Google.


Each member will form an overall opinion about the data and then the group discusses the data.

In theory. In fact the Chairman has excess power. He/she gets to decide which members get the best office space and the best staff. The Chairman sets the agenda and can just not bring up issues he/she doesn’t want to discuss. Presumably at meetings can even refuse to recognize members that he/she does not want to hear from. Though this must br rate, tilting the agendas is not.

The chairman of the Fed actually is like a CEO, but a CEO of a very strange company: a company where someone other than the CEO selects all the division heads, and where the CEO himself can’t fire them.
In some ways it more closely resembles being the president of a university, a job in which various deans exercise most of the day-to-day management of the institution and tenured faculty exert significant influence but can’t be fired.

I would also keep in mind the source of tis story , a newspaper not known for total objectivity.
While members of the Fed can not be fired, they can be forced or bullied into resigning from the office. The President has the IRS and lots of other agencies to make life uncomfortable for those he wants out.

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the markets didn’t like the Fed move. Or rather the fed “no move”
The fact is that there is not much inflation,even when measured by non rosy tinted methodology.

Unless you are sending your kids to college. Or buying , ss I did this week, 30 tablets of a medicine listed at $700 per bottle. Insurance cut it down to a measly $250. I find I can get a bottle of 100 in Canada for about $120. The other side of that is that it may have cost $200 to develop, so if every country was like Canada the drug would not exist because it would be a money loser to develop and market.

The winds of deflation continue to be strong.With technology things should get ever cheaper, but governments and economists don’t like that so push monetary inflation. Which isn’t working well at the moment.

The longer the Fed waits the more difficult it is going to be if some other unknown unrelated deflationary event happens. For instance somebody discovers a battery technology 10 times better than present li ion batteries. The ICE would be obsolete overnight. Everybody would hold off buying one until they could buy an electric car. Which not only would drive better but be vastly cheaper to run.

Meanwhile I think the fed move was actually a non event. So if you are a stock buyer there just was a mini sale on equities today.
Me, I have been mostly but not entirely out of stocks since early August. Based entirely on data driven algorithms . But my data is based on stock prices and it is hard, no data revisions on the way. Even that does not mean that it always works. But even error type sells are followed by buys so I won’t lose much.