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The Fed: Reactive or proactive?

By Allison Ross · Bankrate.com
Thursday, May 15, 2014
Posted: 5 pm ET

Trying to understand where the economy is headed can feel at times like trying to look through a crystal ball.

Which is why the Federal Reserve has repeatedly said it is making its decisions based on economic data.

Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego, recently told Bankrate that the Fed is in a reactive mode.

She told Bankrate that it's "historically a concern to have a Fed that looks in the rearview mirror" as it sets its course, but says the Fed is doing its best, given the uncertainty of the future of the economy.

Downsides to being data dependent

Indeed, the idea of being data dependent doesn't come without its drawbacks.


Scott Wren

"Why wait until the usually lagging economic data tell us it is time to make a monetary policy move?" Scott L. Wren, senior equity strategist with Wells Fargo Advisors, said in a market commentary this week. "By waiting that long, my reasoning goes, our central bank is probably already well behind the curve and often needs to scramble just to catch policy up to where the economy has already gone."

However, Wren then adds that being reactive rather than proactive may still be the better path for the Fed. He notes that "fine-tuning a $17 trillion economy is no easy task under any conditions," and says that Fed has previously predicted better growth than what actually has occurred.

"If the Fed had acted proactively and adjusted monetary policy based on its rosy estimates of better growth rather than the actual data as they are being reported, the economy and stock market might react really negatively," Wren writes.

"So on second thought, just be glad the Fed is data dependent," he says.

For an analysis on the Fed, as well as a timeline of how Fed moves affect mortgage rates, go to Bankrate's Federal Reserve landing page.

What do you think of how the Fed is steering the economic ship?

Follow me on Twitter: @allisonsross.

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