Fed says it is data dependent, but whose data?

Wed Jun 24, 2015 4:28pm EDT
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By Howard Schneider and Ann Saphir

WASHINGTON/SAN FRANCISCO (Reuters) - The Federal Reserve says it will depend on straightforward data analysis in deciding when to raise U.S. interest rates.

But whose data will it depend on?

The large, half a percentage point revision to estimated U.S. first quarter gross domestic product issued on Wednesday by the Bureau of Economic Analysis nearly erased a contraction in output that had unnerved policymakers.

In particular it found that exporters and consumers did better than initially thought. The BEA now says GDP shrank only 0.2 percent over the first three months of the year, not 0.7 percent.

The revision may not change the Fed's policy path, or greatly alter the economic outlook that central bankers just published last week but that's only because the consensus about how to measure U.S. economic growth has begun to fracture.

There are competing views amongst Fed, BEA and private sector economists on the statistical methodology, particularly over such issues as seasonal adjustment, that have led to mistrust of the data.

As a result, the Fed's policy of "data dependence" may turn out to involve a good bit of guesstimating, with each Fed official playing their own hunch about where the economy really stands.

"We don't measure GDP particularly well over short periods of time. It is very difficult. If you dig into it you will see there are just a lot of extremely difficult calls," Fed governor Jerome Powell said at a public appearance on Tuesday.   Continued...

Federal Reserve Chair Janet Yellen attends a news conference after chairing the second day of a two-day meeting of the Federal Open Market Committee to set interest rates in Washington June 17, 2015.  REUTERS/Carlos Barria