- The Fed’s reliance on “faulty” inflation data to keep interest rates high will result in a policy error, David Rosenberg said.
- The latest PCE and GDP data can give a false idea of the true state of the economy.
- The Fed has been too optimistic about employment data based on nonfarm payrolls, Rosenberg said.
The Federal Reserve’s fixation on a series of “faulty” data to justify keeping interest rates higher for longer is bound to trigger a policy error, according to economist David Rosenberg.
“The Fed seems to be focused not just on bad data, but only on headlines. I don’t see as much analysis of the data by individual FOMC officials as much as publication of the data,” Rosenberg said in a note Monday .
He said the consequences of such a misstep wouldn’t be felt until six months later, but when they did, the Fed and markets would be in shock.
“The Fed now intends to stay on the sidelines as it closely monitors lagging and contemporaneous indicators that are littered with high error terms, and the longer it waits, the more it will have to do on the rate front .Shades of 1991, 2001 and 2008,” he wrote.
Rosenberg criticized the Fed’s focus on its preferred PCE inflation data, which came in at a higher-than-expected 3.7% annual rate in March, leading the central bank to believe it is still too early to ease monetary policy.
The economist pointed out that the first quarter data paints a narrow picture of inflation, driven primarily by three idiosyncratic elements: financial services and insurance, health services, and housing and utilities.
“I don’t see how the Fed could influence these inherently non-cyclical areas. And it’s not clear how long these influences will last,” he said, adding that excluding the three elements above, the Core PCE inflation rose only 1.5% per year in the first quarter.
Rosenberg noted that even the modest annualized real GDP growth of 1.6% in the first quarter was mainly driven by government, health care and financial services. Beyond these sectors, real consumer spending has seen only a slight increase of less than 2% per year, far from the narrative of a “booming economy.”
“At the same time, household spending on durable and non-durable goods contracted at an annual rate of -0.4%, and the latter are much more exposed to changes in the economic cycle,” the note said.
Finally, he noted that the Fed’s long-term view that the economy was still buoyant, based on nonfarm employment data, was dashed by the quarterly employment and wage census and of the dynamics of employment in companies.
Rosenberg pointed out that the wages report could overstate actual employment by 70,000 per month. Indeed, the more comprehensive and later QCEW data showed only a 1.5% increase in September 2023, while the widely used nonfarm payrolls report shows 2% growth. each month.
Meanwhile, BED data shows a decline of 192,000 private sector jobs in the third quarter of last year, while private sector payroll data shows a significant increase of 521,000 over of this period.
“We haven’t seen a drop like this since the first and second quarters of 2020, but we also had this type of drop in the third quarter of 2007 and the first quarter of 2001.”
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