Analysis: Fed eyes U. S. rate hike, but second-guesses economic gauges

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Source:   —  April 13, 2016, at 2:21 AM

S. central bank'south interest-rate decisions will depend on how the economy performs. But Fed executive and their staff are already dismissing large swathes of the most recent economic data because they view it as unreliable, a twist that could create it harder for investors, businesses and households to map for the central bank'south following interest-rate move."I'd get the first-quarter genuine GDP estimates with a large grain of salt," the San Francisco Fed'south chief of research, Glenn Rudebusch, told Reuters in an interview on Friday.

Federal Reserve Chair Janet Yellen has declared that the U. S. central bank'south interest-rate decisions will depend on how the economy performs.

But Fed executive and their staff are already dismissing large swathes of the most recent economic data because they view it as unreliable, a twist that could create it harder for investors, businesses and households to map for the central bank'south following interest-rate move.

"I'd get the first-quarter genuine GDP estimates with a large grain of salt," the San Francisco Fed'south chief of research, Glenn Rudebusch, told Reuters in an interview on Friday. "First-quarter will be weak, but we think that it's not representative of the underlying strength of the economy."

The government won't publish its first estimate of first-quarter economic growth until April twenty-eight, the day after the Fed'south following policy meeting, but unofficial guesses are coming in low. The Atlanta Fed, for instance, currently estimates first-quarter GDP growth at a barely perceptible 0.1 percent.

The economy grew 1.4 % in the fourth quarter, and analysts estimate it needs to widen at second % or faster to hold pushing unemployment down.

Rudebusch says recurrent statistical problems with that estimate, related to seasonal swings in everything from weather to spending patterns, means that genuine growth latest quarter was probably closer to 1.6 percent.

"It's big," Rudebusch said of the disagreement between what the data says and what he believes.

Rudesbusch'south views are necessary because he advises San Francisco Fed chief John Williams ahead of, and sometimes during, his regular trips to WA to debate monetary policy.

He's distant from the only data skeptic at the Fed. St. Louis Fed President James Bullard latest week also suggested he'll reduction first-quarter GDP readings, saying powerful work growth numbers, which have kept unemployment at a healthy five percent, give a better picture of the economy.

The U. S. central bank's seventeen rate-setters following meet April 26-27, and then on June 14-15.

The disconnect between what the GDP data says and how Fed staffers and policymakers read it's not a new problem for the Fed, which has endured several years of weakness.

But presently that the Fed is actively looking at when to lift rates again after lifting them in December for the first time in nearly a decade, the problem is more acute.

So-called residual seasonality is but one of a no of challenges in interpreting U. S. data. Economic data is constantly revised, and final reads are frequently significantly higher or lower than initial measurements.

"It’s true that this specific problem, as with any statistical problem, makes the Fed’s work more complicated," says Lewis Alexander, Nomura'south chief U. S. economist. But, he added, "I think that's overdone... People are using this as an excuse neglect weak data."

PROBLEMS WITH INFLATION DATA TOO

Just as first-quarter GDP growth data tends to be understated, inflation data in the first half of the year tends to be stronger than in the second half. Analysts dispute on why, but some peg it to the methods statisticians utilize to smooth price changes for seasonal swings.

Whatever the reason, it worries Chicago Fed President Charles Evans, who counsels waiting before responding to the recent uptick in inflation with further rate hikes.

"It’s not totally clear that those are going to be sustainable increases... I think that’s why we've a small latitude, more than a small latitude, to wait at the moment and collect a few more months of inflation to obtain a small more confident about that," he told reporters in late March.

U. S. inflation has been running below the Fed'south 2-percent target for years and Fed executive declare they wish to be confident it's emotional back up before raising rates. 

"If we were to lift rates much further and then saw inflation not hold emotional up, I’d be nervous," said Evans.

While it's unclear whether the data is powerful sufficient for the Fed to chase through on its forecast for two rate hikes this year, or whether traders betting on just one or even none have it right, most consent there will be number rate hike in April.

The Fed prominently highlighted risks from the global economy at its latest meeting as a reason for caution.

"It’s worth in this environment being patient, and basically being willing to be cautious and let events unfold," Dallas Fed President Robert Kaplan said on Monday. "And we’ll know soon enough."

(Reporting by Ann Saphir; Editing by David Chance, Chizu Nomiyama and Dan Grebler)

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