It's become abundantly evident that domestic U.S. data alone don't dictate the Federal Reserve's stance.
Global economic data and gyrations in financial markets also influence monetary policymaker's assessment of the outlook for inflation and employment in the U.S.
Fed Chair Janet Yellen's speech at the Economic Club of New York on Tuesday reinforced that the central bank places a great weight on these market and international variables — and Deutsche Bank AG Chief International Economist Torsten Slok has a chart that shows just how worried the Fed is about the rest of the world (click on the chart to enlarge):
"It is clear that the rest of the world is playing a more and more important role in Fed policy," wrote Slok. "Time will tell if this is an appropriate strategy."
Risk assets responded positively to the Fed's emphasis on the underwhelming global economic backdrop, with market-based measures of inflation compensation, stocks, and commodities all catching a bid upon the release of Yellen's remarks.
"To illustrate why the Fed's clear shift to a more dovish stance is so effective in reducing uncertainties in financial markets, consider our recent survey of U.S. credit investors," explained Hans Mikkelsen, head of high grade credit strategy at Bank of America Merrill Lynch. "Arguably at least three — if not all — of the top-four investor concerns — China, oil prices, geopolitical risk and slow recovery — are mitigated to some extent by the more dovish Fed."
Yellen alluded to this reflexivity between markets and the Fed in molding the economic outlook in Tuesday's speech.
