It's become abundantly evident that domestic U.S. data alone don't dictate the Federal Reserve's stance.
Global economic data and gyrations in financial markets also influence monetary policymaker's assessment of the outlook for inflation and employment in the U.S.
Fed Chair Janet Yellen's speech at the Economic Club of New York on Tuesday reinforced that the central bank places a great weight on these market and international variables—and Deutsche Bank AG Chief International Economist Torsten Slok has a chart that shows just how worried the Fed is about the rest of the world:
"It is clear that the rest of the world is playing a more and more important role in Fed policy," wrote Slok. "Time will tell if this is an appropriate strategy."
Risk assets responded positively to the Fed's emphasis on the underwhelming global economic backdrop, with market-based measures of inflation compensation, stocks, and commodities all catching a bid upon the release of Yellen's remarks.
"To illustrate why the Fed's clear shift to a more dovish stance is so effective in reducing uncertainties in financial markets, consider our recent survey of U.S. credit investors," explained Hans Mikkelsen, head of high grade credit strategy at Bank of America Merrill Lynch. "Arguably at least three—if not all—of the top-four investor concerns—China, oil prices, geopolitical risk and slow recovery—are mitigated to some extent by the more dovish Fed."
Yellen alluded to this reflexivity between markets and the Fed in molding the economic outlook in Tuesday's speech.
"In part, the baseline outlook for real activity and inflation is little changed because investors responded to those [negative global economic and financial market] developments by marking down their expectations for the future path of the federal funds rate, thereby putting downward pressure on longer-term interest rates and cushioning the adverse effects on economic activity," she said, indicating that the feedback loop between the two constituted an "automatic stabilizer" for the economy.
"Foreign economic growth now seems likely to be weaker this year than previously expected," added Yellen.
Economic data released overnight justified the Fed Chair's continued concern about the state of the global economy, with February's reading of Japanese industrial production showing the largest one-month drop since the 2011 earthquake.
"Data support Yellen's worries about [the] world," wrote Neil Dutta, head of U.S. economics at Renaissance Macro Research. "While the manufacturing sector in China has suffered and the consumer sector has shown resilience, there have been signs that the latter may not be as bullet proof as previously thought."