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Today we are witnessing a cultural shift where institutional authority is becoming the dominant source of truth. The U.S. Federal Reserve’s (The Fed) GDPNow estimates, for example, often overshadow alternative perspectives, establishing a single narrative that can significantly influence market psychology. This deference to authority shapes how we understand economic growth and market dynamics, raising an important question: Are we sacrificing critical thinking in favour of institutional convenience? In this piece, we explore how the growing reliance on GDPNow reflects a broader trend toward an institutional narrative, how it influences psychological perceptions of the economy, and how it’s reshaping our understanding of complex economic issues.

In 2013, the Fed, under the leadership of Ben Bernanke, embraced a significant shift in its monetary policy strategy, placing a stronger emphasis on communication. Influenced by prominent economists such as John C. Williams (current President of the Federal Reserve Bank of New York) and Michael Woodford (professor of Political Economy at Columbia University), the Fed adopted “the Woodford model” in which managing expectations became central to monetary policy. The Fed introduced several new communication tools, including the “dot plots,” more frequent speeches, and regular press conferences, which have become vital instruments in guiding market expectations. This meant that the central bank could influence market behaviour and public sentiment without necessarily altering interest rates or traditional monetary levers.

A notable development during this period was the launch of the Atlanta Fed’s GDPNow model, which offered real-time estimates of U.S. GDP growth. Although it wasn’t explicitly designed as a tool for managing market sentiment, GDPNow has increasingly been treated as such. The immediacy of its data, coupled with its growing accuracy, has led market participants to rely on it as a substitute for the Bureau of Economic Analysis’ (BEA) official GDP report. In fact, GDPNow has become so ingrained in the financial ecosystem that the BEA’s official GDP data—and especially its revisions—have become secondary, almost an afterthought for many investors and traders.

GDPNow’s evolution into what many practitioners treat as “GDP^tm” reflects a broader trend toward reliance on headline data. The immediacy of these real-time estimates has a cultural resonance; it plays into the market’s desire for instant information, much like employment data, where initial figures often drive sentiment and market moves, with revisions largely ignored. In this landscape, the headline becomes the dominant signal for trading, and by the time revisions are published, the market has already shifted its attention to the next wave of information.

This growing reliance on GDPNow ties directly into the Fed’s broader communication strategy under the Woodford model. The central bank’s ability to shape economic behaviour through communication—whether it’s forward guidance, press conferences, or real-time tools like GDPNow—has become a cornerstone of modern monetary policy. If the Fed can manage market expectations through its words, then all forms of official communication become policy tools in their own right. This explains why the Fed’s press conferences have become increasingly scripted, with Federal Reserve Chair Jerome Powell often turning to pre-written answers, carefully managing the narrative to prevent any misinterpretation.

In many ways, GDPNow functions as more than just a “now-casting” model. It has become a tool for managing the “animal spirits” of the market, much like how the Fed manages inflation expectations. By influencing how the public perceives future inflation, the Fed can indirectly shape actual inflation outcomes. GDPNow works similarly, shaping market expectations around growth. When the model’s real-time estimates point to robust growth, it can spur increased confidence, perhaps even leading to more investment and consumer spending—effectively nudging economic activity through psychological means.

Additionally, the visual presentation of GDPNow, as illustrated below, which contrasts its estimates with the “blue-chip consensus” of private forecasters, has further solidified its authority. Over time, GDPNow has shown increasing accuracy compared to these consensus forecasts, reinforcing its role as the “official” narrative on economic growth. This growing accuracy has led markets to increasingly embrace GDPNow as the singular truth, sidelining the once-diverse range of forecasts that characterized economic analysis. In this environment, GDPNow’s projection isn’t just one of many competing perspectives—it becomes the perspective.

GDPNow chart as of September 26, 2024 (https://www.atlantafed.org/cqer/research/gdpnow)

This shift reflects a broader cultural trend toward institutional deference, where projections from trusted authorities are treated as definitive signals. We see this across various spheres: from economic forecasting, to environmental policy, to public health, to pedagogy, and to media fact-checking where the embrace of singular narratives has diminished the appetite for alternative views. Both markets and policymakers now often defer to institutional projections, seeking one cohesive, authoritative version of the truth, rather than navigating the nuances of competing forecasts. In this way, GDPNow not only signals economic growth, but also shapes how growth is understood and traded upon, in a way that simplifies and centralizes the narrative around one institutional source.

The timing of GDPNow’s introduction during the Bernanke regime may or may not be a coincidence. Regardless, it fits neatly into the broader shift toward using communication as a primary policy tool. While it wasn’t necessarily designed with the intent to manage expectations, it has been absorbed into the Fed’s arsenal for psychological management. Its influence has grown to the point where GDPNow is not merely a data point, but part of the Fed’s broader effort to shape market behaviour in real-time.

In this light, GDPNow has effectively become a key fulcrum for balancing the Fed’s dual mandate of stable prices and maximum employment. By guiding public and market expectations around GDP growth, the Fed can indirectly influence economic outcomes without immediate policy action. It provides the Fed with a real-time lever to manage growth perceptions, much like how forward guidance influences inflation expectations. Through this and other communication strategies, the Fed continues to rely more on shaping narratives than on traditional monetary policy, reinforcing its role as a driver of market behaviour.

Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth

Office: 416.369.3024
Email: bwk@wellington-altus.ca
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Ben Kizemchuk offers full-service wealth management for high-net-worth Canadians including families, business owners, and successful professionals. Ben and his team provide investment advice, financial planning, tax minimization strategies, and retirement planning.

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