Fed strategy shifted from “risk manager” to “data dependent”

At the end of the 2008-9 crisis, the US was expected to go into a "rehab recovery"-a slow, fragile recovery as the banking, housing and household sectors healed. Fiscal brinkmanship and austerity added to the headwinds in 2012-14. Hence, for the first five years of the recovery analysts were persistently on the dovish side of the Fed debate.

"We argued that both growth and inflation would come in below the Fed's forecasts. We believed the Fed was taking a "risk management" approach to policy, learning from Japan's lost decade and Europe's more recent crisis. After a major banking and real estate crisis it is better to err on the side of being too easy, too long, than to tighten prematurely and risk deflation", says Bank of America. 

By 2013, it was increasingly clear that the rehab recovery was working. The housing market had returned to normal, bank lending had picked up and the labor market was on a steady path toward full employment. In May 2013 the Fed announced a regime shift. Bernanke announced that the Fed would taper later in the year, but only if the data matched their forecasts. This shift to "data dependent" changed the way we looked at the Fed. Up to that point the Fed was clearly overriding Taylor Rule type policy rules. If they were "following the rules" they should have started their exit at least a year earlier given the drop in the unemployment rate, added Bank of America. Now, by going "data dependent" the Fed was in effect saying: "we know we are already late relative to a typical Taylor Rule. That is appropriate given economic headwinds.