How the Fed Uses Data to Set Rate Policy | Lord Abbett

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Economic Insights

Recent comments from the Federal Reserve suggest the U.S. central bank is now more forcefully targeting data expectations rather than data realizations.

The Federal Open Market Committee (FOMC) concluded its June meeting with another dovish stance on U.S. monetary policy, saying that it aims to “closely monitor” developments. Lord Abbett’s Leah Traub shared her take on the meeting’s outcome, and what to look for ahead of the July meeting. Specifically:  the Federal Reserve’s (Fed’s) forecast for the personal consumption expenditure (PCE) price index, an inflation indicator, was lowered from 1.8% to 1.5% in 2019 and core PCE was downgraded to 1.8% from 2%. This is significant, as the Fed is now expecting that inflation will be below its 2% target this year, providing justification for a rate cut in July. Leading up to the July FOMC meeting, we take a closer look at how the Fed defends forward, i.e., with a focus on data expectations rather than data realizations.

Economic Data and Forecast Targeting
The Fed’s recent comments suggest a more forceful targeting of data expectations, which we interpret as a more extreme form of “data dependency” or forecast targeting. Here are four observations that support this take:

1. The Fed and Risk Management: During the Janet Yellen-led Fed, “risk management” referred to the need to increase rates gradually and a bit early in order to avoid having to tighten more aggressively later in the cycle. Today, the Fed uses the term “risk management” to explain aggressive early easing in a low neutral rate environment with limited conventional policy space.

2. The Importance of Market-Based Measures of Expectations: While it is difficult to interpret the prices of market instruments due to the various risk and liquidity premia they embed, it seems Federal Reserve Vice Chair Richard Clarida weights them heavily. Taking this approach, an inverted yield curve is a signal that monetary policy is too tight. Market-based inflation expectations provide a corroborating signal.

3. The Global Growth to U.S. Feedback Loop: Over time, the role of U.S. dollar supply and international growth became a central topic of FOMC discussion. Clarida recently noted that, when the global economy slows, it impacts the U.S. through exports and financial conditions. We interpret this as hinting that the Fed seems more willing to take action based on financial conditions outside of the United States.

4. Forward-looking Forecast Focus: The long-run neutral rate frames the U.S. Fed’s policy discussion. The rate dropped in the last summary of FOMC projections, implying we are currently at a neutral rate. More importantly, If you are at neutral and activity is slowing, it supports the idea that policy is too tight.

For a Fed that defends forward, we believe domestic data is less weighty today than in decades past. The Fed can influence financial conditions and future economic activity more effectively by acting early, thereby creating a better chance of moving closer to the 2% inflation target.

Be sure to visit for the latest insights leading up to July’s U.S. Fed meeting, and for post-meeting commentary describing what we think the outcome could mean for investors.


Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The Federal Open Market Committee (FOMC), the policy-setting arm of the U.S. Federal Reserve, issues projections of the rate of U.S. economic growth at the conclusion of its meetings in March, June, September, and December of each year.

The Federal Reserve System (Fed) is the central bank of the United States and is governed  by the Federal Reserve Board.

The personal consumption expenditure (PCE) price index is one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy.

Yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. One such comparison involves the two-year and 10-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.  If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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