MNI POLICY: Fed To Look To High-Frequency Data In Shutdown

High-frequency data sources refined during the pandemic will enable the Federal Reserve to continue to monitor trends in employment and inflation if a U.S. government shutdown delays official statistical releases at a time when officials are stressing the data-dependency of monetary policy.

While the Fed's forecasting models are based significantly on data from the U.S. Labor and Commerce departments, Census Bureau and other official sources, the central bank’s economists could rely more heavily on private sector reports such as those from the Institute for Supply Management, intelligence from district business executives and Reserve Bank directors, as well as high-frequency data from a variety of firms to paint a picture of economic activity in real time.

A looming shutdown Sunday threatens to delay the release of key indicators including the September employment and CPI reports -- just weeks ahead of a possible interest rate increase at the Oct 31-Nov 1 FOMC meeting.

A number of "alternative" data sources were developed during the pandemic, when government data were stale by the time they came out. Booking platform OpenTable started publishing daily information on restaurant reservations, and scheduling software Homebase made available numbers of hourly employees at small local businesses. Economists both inside the Fed and out have rapidly refined methodologies for judging the efficacy of such new data sources and blending them with the official ones.

REASONABLY GOOD ALTERNATIVES

A Weekly Economic Index, developed by Dallas and New York Fed economists and a Harvard University professor in 2020 and based on 10 high-frequency data series, of which only two (weekly initial and continuing jobless claims) are from the federal government, was highly useful in tracking the rapidly changing economy during the pandemic.

Chicago Fed economists created an Advance Retail Trade Summary indicator during the pandemic to give an early and frequent snapshot of retail spending, using private data on store revenue, consumer sentiment and retail foot traffic.

The ISM's detailed surveys of purchasing managers in the manufacturing and service sectors are always closely watched, but especially during periods when government data are not updated. Several Fed banks also regularly conduct and publish surveys of manufacturing and service activity, which ask about cost pressures and hiring trends. The Fed -- the institution operates independently and is unaffected by federal shutdowns -- continues to publish banking lending data on a weekly basis.

Anecdotal evidence matters greatly as well. Directors on the boards of the regional Fed banks provide first-hand knowledge of national and regional business developments. Fed staff collect on-the-ground anecdotes for the Beige Book ahead of each FOMC meeting and survey organizations to create activity tracking diffusion indexes, and Fed presidents call business leaders regularly whether or not the country is in a data fog.

BEST DATA AVAILABLE

Fed Chair Jerome Powell stressed data dependence last week after the FOMC said it would keep rates on hold while officials continue to weigh whether a final quarter-point increase is needed by December.

Minneapolis Fed President Neel Kashkari said this week he is confident the FOMC will be able to make decisions with the data available.

"We try to get our hands on all the data we can. A lot of times the data that we get are sending mixed signals. We still have to make decisions with the data we have available. If we can't get access to the government data that we rely on, we'll supplement that with the best private sector data that we can."