Fed relying on biased data that makes 'B-minus 'economy' look like an 'A+' : James Bianco

A veteran market researcher is out with a warning — saying the Federal Reserve is relying too heavily on economic surveys skewed by social media to mold their policies.

According to Bianco Research President James Bianco, most economists mistakenly believe that leading indicators are signaling an "A+" economy that can withstand rising interest rates.

"It's more like a B- economy," he told CNBC's "Trading Nation" on Friday. "It's not this screaming home run that everybody thinks it is based on the survey data."

Bianco said social media is creating the bandwagon effect among survey respondents, a psychological phenomenon characterized by people following the herd.

"The advent of social media is allowing us basically to be inundated with financial news or economic news," he said, adding the bulk of the news about the world's largest economy has been largely favorable.

"When somebody is asked 'what do you think about the economy,'' they are not answering 'what do you think about the economy,' Bianco said. "They are answering 'What have you read about the economy?'"

Bianco fears the Fed will make a policy error based on respondents' answers.

"Economists like at the Fed say 'Wow, look at that data. It's even better than we thought. We have to raise rates even faster,'" he said, adding that the tightening could derail the bull market.

"The 10-Year [yield] could very well be at 3 percent by the end of next year with a 3 percent funds rate," Bianco said. "[That's when] you get an inverted yield curve."

He suggested Fed officials should evolve and begin looking at other types of data. A solution would be favoring Google Trends, according to Bianco. His research suggests it's a far more accurate predictor of how the economy is faring.

"We bare our souls to Google," Bianco said. "If we lose our job, we type in 'I lost my job.' You can search that stuff and what you find is you're right back to my B- argument."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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