- The Washington Times - Saturday, May 20, 2006

May 10 the Federal Reserve issued its official statement summarizing the Federal Open Market Committee’s (FOMC) decision to raise the federal funds target rate another quarter point to 5 percent. The Fed said any further rate increases “will depend importantly on the evolution of the economic outlook as implied by incoming information.”

Many media accounts interpreted the word “information” to mean economic statistics, not surprisingly. And it’s certainly true that forthcoming statistics will help guide future interest rate decisions. But the Fed used the word “information” instead of “statistics” deliberately and for good reason. Information is much more than numerical data. It’s also qualitative and anecdotal and an important supplement to statistics. It’s the flesh that binds and reshapes the numerical data, and it’s vital for monetary policy.

In remarks before the Economic Club of New York on March 20, Fed Chairman Ben Bernanke spoke about economic information, saying monetary policymakers should monitor the relevant statistics in judging the state of the economy along with “a goodly helping of qualitative information.”

In November 2004, Dallas Fed Vice President Evan F. Koenig wrote “policymakers should not necessarily take official government statistics at face value, and should be open to alternative sources of information, including anecdotal reports and surveys.” He said “official statistics have been misleading” and anecdotal information “has provided early warning of important changes in the economy.”

It’s often forgotten official economic statistics are sometimes based on definitions that require assumptions or subjective choices. In many cases, these numbers are subject to large revisions and may be incomplete, conflicting or out-of-date, whereas qualitative observations are less so and are often not as “noisy” as short-term data.

However, gathering qualitative economic information on a scale useful for policymaking requires a well-organized, decentralized institutional structure. Fortunately, the Fed has that in its 12 regional banks.

The most important Fed compilation of anecdotal information about the economy is in its Beige Book, named for the color of its covers. In advance of FOMC meetings, the Federal Reserve banks and their branches obtain current economic information in their areas from such sources as business advisory councils, branch bank directors, economists and market experts and from personal contacts in business, agriculture and labor. Fed banks then analyze the information by sector and prepare district reports, and from these a national summary is distilled. The final report is publicly available on the Fed’s Web site about two weeks before FOMC meetings.

In 1964, then Fed Gov. George Mitchell, talking about anecdotal economic information and its value to FOMC decisionmakers, said it “brings to the committee qualitative judgments and insights that aggregate statistics will always lack.” Later, according to May 1970 FOMC minutes, Fed Chairman Arthur Burns “formalized and broadened the information-gathering process” and “emphasis was placed on qualitative information, such as opinions and judgments.” Former Fed Chairman Alan Greenspan became a master at combining qualitative and quantitative information to assess the state of the economy.

Not all Fed officials have appreciated the value of anecdotal information. Former Fed Vice-Chairman Alan Blinder in a 1997 article referred to the Fed’s gathering of such information as an “ask your uncle” approach. In a subsequent paper, David Fettig, Arthur J. Rolnick, and David Runkle of the Minneapolis Fed responded: “[T]here may be some merit in asking your uncle. Such ‘reality checks’ may give policymakers the ‘stories’ that help them make sense of the statistics and models that they pore over prior to each FOMC meeting.”

Indeed, qualitative information tells a real-economy story beyond numerical data. Words are tools of power that describe the economic dimensions of psychology, expectations, preferences, incentives and goals, all relevant to monetary policy.

At first blush it may seem a small thing when the word “statistics” or “numbers” is substituted for “information.” But it’s not.

To tamper with an old song title, “What a difference a word makes.”

Alfred Tella is former Georgetown University research professor of economics.



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