It’s amazing how the same set of economic data can create two very different opinions on the overrated Fed Funds hike issue. In two Bloomberg opinion pieces last week, we see the stark difference:
Tim Duy: It’s Way Too Early for the Fed to Consider a March Rate Increase
Charles Lieberman: The Fed is Behind the Curve
To make their cases, both cite the employment numbers and the consumer price inflation rate. Duy states that the Fed wanted the unemployment rate to be around 4.5 percent, but it’s still at 4.8 percent. So allegedly, it’s got “room to run.” Lieberman looks at the unemployment on a broader timeframe and concludes that the current levels have “historically been universally regarded as full employment.”
On price inflation, here is Duy: “Core inflation, as measured by the Fed’s preferred price index, was running at just 1 percent on an annualized basis in the final three months of 2016.”
And then Lieberman states that price inflation is already above 2 percent “for all the primary inflation measures, except the Fed’s preferred measure, the core personal consumption deflator, which may also soon rise above 2 percent.”
In other words, statistics are not standalone, self-interpreting declarations of the nature of reality. Rather, they are highly interpretable and theory-dependent, in sharp contrast to the positivism of modern economics. The Fed and economic commentators are blinded and stuck in perpetual contradiction with each other. The solution is not better statistics or “more clear data,” which the Fed seems to have been dependent on for the last 8 years since the crisis. The solution is better theory, an entire new framework. Without theory, statistics are useless.
