Market participants increasingly see monetary policy as being data dependent, according to an
When interest rates are close to zero, there doesn’t seem to be a connection between policy and incoming economic data, especially if the rates are not expected to change, according to the Letter, authored by bank President John C. Williams and research associate Benjamin Pyle. At that point monetary policy is constrained and one strong report won’t result in an upcoming rate hike, and weak reports “since the Fed has little room to lower rates further.”
“In the past year or so, market-based measures of data dependence have risen considerably, although they are still below earlier norms,” the Letter notes. “This suggests that investors are increasingly viewing monetary policy actions as data dependent.”
“With the economy on the mend and FOMC communications emphasizing the data dependence of policy actions, market-based measures of future interest rates became more responsive to economic news,” the authors note.
