CNBC Explains

Finding 'Goldilocks': CNBC explains

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Economic data can be like the porridge of a certain fairy tale: Too hot, too cold, or just right.

Comprehending numbers that are too cold is fairly easy. If the unemployment rate should spike, for instance, that would indicate a shivering economy. So would a drop in gross domestic product, manufacturing, durable goods orders or a slew of other below-expectation government reports.

Trying to discern numbers that are too hot can get a little trickier.

Inflation would be the classic example. Should the consumer price index or personal consumption expenditures measure rise too much over a particular period, that would point to an economy that is growing too fast for its own good.

Results of a too-hot economy are inflationary pressures that infect the economy in numerous ways. The most obvious is in consumer prices that we see at the gas pump, grocery store and housing costs. The slightly less obvious way is through accelerating interest rates that make borrowing more expensive.

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Then there are the numbers that hit the sweet spot.

Just as Goldilocks found Baby Bear's porridge to be "just right" in "Goldilocks and the Three Bears," economists look at certain pieces of data and find them to be right in the middle of too hot and too cold.

David Shulman, the former Salomon Brothers analyst generally considered the first to introduce Goldilocks into Wall Street lexicon back in 1992, once described it as "hot enough for profit growth, but cool enough to keep the Fed from hiking interest rates."

One of the best examples of a Goldilocks economy indeed was the economy of the 1990s, the so-called Great Moderation when growth was steady though not outsized and stocks marched higher as monetary policy stayed accommodative.

It is the Federal Reserve, which sets monetary policy, that makes Wall Street lose the most sleep these days.

Read MoreWhat do investors fear most? The Fed's bubble

In an effort to shock the economy back to life after the financial crisis, the Fed embarked on a monthly bond-buying program and anchored its short-term interest rate target near zero. However, central bank officials have stressed that the future of the program relies on the relative strength of the incoming data.

In other words, economic porridge that is too cold gets more Fed help, while porridge that is too hot gets less. With the stock market and interest rates highly correlated to Fed actions, investors are counting on things to go at least according to expectations. They know the central bank can't ease forever, but they worry over data that might send it to the exits quicker than forecasts.

—By CNBC's Jeff Cox