FOMC Report: Enough growth, but too much volatility

March 16, 2016 09:20 AM

The degree to which economic agents have been affected by the unsteady nature of economic progress is demonstrated in the enclosed chart of the Citibank Economic Surprise Index – United States (Source: Bloomberg LP). Here a cyclical tendency in the flow of economic data is quite evident. It is apparent that stronger economic growth in mid-year is extrapolated, but not achieved. Softer late-year growth too is over-emphasized and the data series once again outperforms expectations, setting up an annual recurrence. We appear to again be at the point where weak late-year growth is found not to have been as lasting as earlier feared. 

Note also the rather modest swing in the Economic Surprise Index since early 2015 relative to that seen in prior years.  It could be that economic agents are simply becoming less surprised in the cyclical nature of economic data.  In any case, a reduction in over-reaction could help to bring in line the data itself on a path more conducive to the Fed ‘normalizing’ policy rates.  

The Fed does not want to add to either economic variability or the overshoot or undershoot of expectations, but rather would be quite content with growth that is steadier toward 2% (or greater) on a quarter by quarter basis. Mainly because of the current rate structure, Fed officials have to walk a fine line in order to ‘normalize’ policy rates given the concern for adverse response in attending those interests. Market expectations are for the Fed to refrain from adjusting policy rates at this meeting. A decision to raise policy rates now even if economic data can be used to justify, would add a measure of financial market volatility and distress that cannot be reckoned with a goal of achieving steady growth. 

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About the Author

Martin McGuire, managing director at TJM Institutional Services