Move from calendar based to data dependent Fed guidance - a step backwards

The Fed has been refining policy transparency in the Yellen era by moving from a calendar-based forward guidance approach to the newer operating guidance of being “data dependent”. The time based Fed guidance of saying action is more or less likely in the near-term caused clear time dependent forecasts of Fed action in forward rates. Action was pushed-up or back based on the guidance given. Data dependent guidance may be less informative at least until we get a better idea of how this is going to work. 

Central bank action should always be data dependent. How else should good decisions be made? The relevant issue is how is data weighted by central bankers. This is the key to providing transparency to the markets; nevertheless, this is the missing link from the central bank. How much weight is placed on the output gap? How much weight is placed on inflation or macro stability? In macro language, what is the Fed reaction function. The Fed is not disclosing this information. The Fed certainly does not want to constrain itself by fixing the reaction function and It could be evolving. The burden is on market participants to figure out the data weights of policy-makers.  

FED ACTION PUSHED INTO FUTURE 

Life is bare, gloom and mis'ry everywhere
Stormy weather

Just can't get my poorself together,

-Billie Holiday "Stormy Weather "

The 1st Quarter US GDP numbers at .2% surprised on the downside. The “data dependent” Fed will now need supporting evidence to offset the "bad weather" quarter. The cautious behavior of the Fed will continue. This was not just a weather outlier. The plunge in exports suggests that the dollar gains are taking a bit out of US growth. 

WATCH ATLANTA FED GDP NOW FORECAST 

We watch closely the Atlanta Fed’s new GDP Now forecasts to see how the GDP numbers evolve over time through live data disclosed through the quarter. This forecast was showing the weak first quarter GDP numbers a month earlier and was below consensus at least two months earlier. If the Fed was watching this number closely, they would not have been surprised by the .2% estimates.