Heed the Data, Not What Fed Officials Say

Is Federal Reserve Chairman Jerome Powell a dove or a hawk on inflation? Most likely, he is neither. Instead, he's data dependent. That's important because all Fed senior officials are being pushed by the economic data in the direction of more or faster interest-rate increases. Investors are catching on, with the market starting to price in four rate hikes this year.

Answering questions by lawmakers about the state of the economy three weeks ago, Powell largely relied on the data. He avoided projecting outcomes, even if they seemed logical. When asked whether there was still room for people outside the workforce to be drawn in and enable hiring to continue at a pace that is above trend, Powell was willing to accept that labor-force participation for prime-aged adults was still low at 63 percent. He was careful, though, to avoid predicting whether more individuals might rejoin the job market.

Powell also acknowledged that growth had improved, but didn't suggest the economy was overheating. His remarks also implied that he was inclined to wait to see if inflation pressures become manifest in the form of accelerating labor costs and higher price inflation.

But when even an established dove such as Federal Reserve Bank of Minneapolis President Neel Kashkari, who has dissented often against rate hikes, acknowledges that growth has picked up significantly, it is easy to determine that Fed officials are moving toward more increases. That said, the pace matters, and that requires more data on how the economy is evolving.

The Fed has consistently overestimated real economic growth, while underestimating the drop in unemployment. It is very difficult to reconcile faster growth with slower declines in unemployment. This may explain why some officials hope that those outside the labor force will re-enter or productivity will accelerate. The Fed's Statement of Economic Projections, which will released after the Federal Open Market Committee meeting, will be useful in understanding how policy makers choose to modify their unrealistic forecasts.