U.S. Fed shouldn't be data-dependent: Tal

Investors suspect that the Fed is market-dependent, but Yellen insists the central bank is data-dependent. However, data dependency can be problematic, says Ben Tal, deputy chief economist at CIBC World Markets, in a new insight report.

One reason for this is economic data can be inconsistent, says the report. For example, there’s been a “disconnect between the rapid pace of job creation in the U.S. and the dismal growth in output.” And, there’s an ongoing debate regarding the credibility of productivity measures—in the mid-1990s, former Fed Chair Greenspan questioned productivity numbers based on the widening of corporate profit margins in the absence of rising pricing power.

Read: U.S. Fed disappointed by wage growth

Currently, margins are even wider and productivity growth is weaker. In fact, says the report, “The gap between margins and productivity growth is hovering at an all-time high.” So, economic leaders might be underestimating productivity growth and its impact on GDP growth.

Tal argues that a central bank that is market-dependent isn’t ideal. But when the Fed’s data-dependent, that also makes it difficult to read whether the central bank is making the right policy calls. To read the full report, click here.

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