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Fed's Symposium Message to Investors: 'Don't Trust the Data'

Fed's Symposium Message to Investors: 'Don't Trust the Data'
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Monday, 27 August 2018 09:06 AM Current | Bio | Archive

What Did We Learn in Jackson Hole?

The Federal Reserve’s Jackson Hole Symposium in Wyoming is not designed to focus on the near term.

Inevitably, the near term is all markets care about. Fed Chairman Jerome Powell’s speech was therefore interpreted signaling a steady pace of tightening and confirming the likelihood of a September rate rise.

As the recent minutes the FOMC meeting already had spelled out a September rate rise, this is not a particularly startling revelation.

A couple of FOMC voting members like:


did give direct support to the idea of two further rate hikes this year in interviews. 

Of  more importance to analyzing policy over the median term were remarks on the dangers of setting policy in a time of structural change.

Inflation may not be the best signal of "overheating," especially as so much of the U.S. inflation data today is unrelated to the market forces. If that is true, then the bond market’s view of inflation is not especially useful as a guide to "overheating" or to future policy, hence problems with the yield curve as predictor of the economic cycle. 

The danger of trying to predict things like the “natural rate”of unemployment or the “neutral interest rate” were also stressed by Powell, or whoever wrote Powell’s speech.

This is a variation on the “Lucas critique” (Lucas critique states that purely empirical relationships - relationships between variables that are estimated from the data without backing from economic theory - cannot be used to do meaningful counterfactual policy analysis.

The reason is that any such relationship depends on “the rules of the game”, and the counterfactual is intended to determine what happens when those rules change. So, if you want to do that sort of analysis, you need to model the “deep” parameters of the economy, such as consumer preferences, not just simpler things like supply and demand curves.

This was a very important economic insight, because it showed that there were major problems with how certain groups of economists were doing research in the mid-1970s, and those problems would lead to bad policy advice).

Basically, the phrase that should be carved over the entrance of every financial dealing room in the world is: “Don’t trust the data.”

Keeping that in mind could be helpful for investors.

“Trade” came also up at Jackson Hole as well it might. The concern that President Trump’s ‘taxing’ of consumers will push up inflation is now being voiced.

Some of the early tariffs or taxes were till now largely invisible to the U.S. consumer. Things like tariffs on steel take a long time to work their way through the system, but as tariff after tariff, or tax after tax is added, the effects become more obvious.

Last week’s trade talks with China did not appear to lead to any conclusions and President Trump has been tying the trade talks with China to the failure of North Korea to follow through with denuclearization.

In one of his tweets, he indicated that he holds China responsible in part for the lack of progress: “...Additionally, because of our much tougher Trading stance with China, I do not believe they are helping with the process of denuclearization as they once were (despite the UN Sanctions which are in place)... 12:36 PM - 24 Aug 2018”

These comments would suggest that “trade” will remain a near-term focus as the scale of the next round of tariffs or taxes on the U.S. consumer on $200 billion of goods ‘partially’ made in China is now being considered.

The U.S. and China will continue their standoff in the ongoing trade war as there is just not “enough pain” yet for either side to back off said one observer.

Europe’s Role in World Affairs

Over in Europe, German Chancellor Merkel used on Sunday a television address to push for a more assertive role for Europe in World affairs. This may be the trend over the median term. With the U.S. retreating from global leadership upon several fronts, it may well be that the European Union takes the leading role in trade regulation, climate change and other issues that matter to economics.


President Trump tweeted yesterday: “Our relationship with Mexico is getting closer by the hour. Some really good people within both the new and old government, and all working closely together....A big Trade Agreement with Mexico could be happening soon! 8:22 AM - Aug 25, 2018”

Yes, news about NAFTA is in the air.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Basically, the phrase that should be carved over the entrance of every financial dealing room in the world is: “Don’t trust the data.”
fed, data, investors, rates
Monday, 27 August 2018 09:06 AM
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