The Fed Has a Story for You

Has the Fed tapped into a new source of economic information? Headlines note an uptick in Fed officials’ citations of feedback and anecdotes from local businesses and households, which some tout as a more timely, “real world” look at economic conditions than official, aggregated data. But the story of the Fed increasing its outreach to Real People in Business reeks more of politicking rather than a new move to get insight into the economy. Tune down the claptrap calling this an important shift.

A recent Bloomberg article shared how Fed officials are searching for “real-time, on-the-ground” information about the US economy by soliciting feedback from local businesses and consumers.^[i] The examples are legion: Last week Thomas Barkin of the Richmond Fed discussed inflation with 120 businesspeople in Westminster, South Carolina. Dallas Fed President Lorie Logan talked to business economists in October, calling those conversations a “critical complement to the hard data.” Philly Fed President Patrick Harker noted small businesses told him they were struggling to get capital while Raphael Bostic of the Atlanta Fed visited factories in Mobile, Alabama to get a sense of labor trends. Even Fed head Jerome Powell visited York, Pennsylvania, to listen to agricultural firms’ concerns about high prices.

Bloomberg concluded these local experiences may indicate a disconnect with official economic data. The meetings and stories give an impression the Fed is getting boots on the ground to learn how Main Street is faring—which may factor into monetary policy. For instance, if regional Fed presidents are hearing about local hiring slowdowns, perhaps they will be more reluctant to hike rates—even if the national monthly jobs report looks strong.

But slow down. For one, the Fed’s efforts here aren’t new. Some of these visits are part of the “Fed Listens” initiative, which started in 2019 as a way for the Fed to hear how monetary policy impacts peoples’ daily lives. Others are part of regular monthly reports collected by Fed researchers. While individual companies’ situations aren’t necessarily reflective of the broader industry or sector, we aren’t anti-anecdote—hearing directly from company executives and small business owners can add useful color and context. Business owners’ perspective could also help inform Fed officials, whose expertise is more in academia, law and government than business or banking.

Yet the Fed has always incorporated a broad spate of data—including anecdotes—into its analysis. A dive into historical transcripts proves it. Over the years, Fed officials have cited myriad local economic developments, from waffle ingredients for ice cream cones to ticket prices for the musical Hamilton. We aren’t pooh-poohing these examples, either, as they can shed revealing insight. For example, in 2011, Jeffrey Lacker of the Richmond Fed noted many firms in his district struggled to hire because prospective candidates couldn’t pass a drug test—interesting perspective that won’t show up in a broad output gauge, even if the monetary implications seem limited.^[ii]

However, incorporating anecdotes into its outlook doesn’t make its forecasts any more accurate. Go back to September 2008, weeks after the Fed forced Lehman Brothers to fail. Then-San Francisco Fed President, now-Treasury Secretary Janet Yellen claimed shuddering financial markets’ effects were limited. She said there may be some impacts (e.g., local plastic surgeons reported fewer elective procedures while high-end restaurants had more availability) but that was about it—part of a relatively upbeat outlook amid recession. It was also wrong, considering the worst financial panic since the 1930s was well underway. Or take December 2009, when Sandra Pianalto of the Cleveland Fed suggested the economy hadn’t yet turned the corner since her business contacts reported little desire to invest due to regulatory uncertainty and weak demand.^[iii] Yet at that point, the US was nearly half a year into a decade-long expansion. Note, too, the Fed has slews of surveys that come in providing anecdotes from businesses. Purchasing managers’ indexes, for example, often include color commentary from respondents.

To us, the Fed’s more public outreach seems geared to winning some political brownie points and improving its image. It could use the boost given its forecasts have been wide of the mark over the past several years, and its decisions very likely worsened inflation. While the Fed couldn’t do much to alleviate pandemic-driven supply chain issues, it didn’t help matters by flooding the economy with money while things were locked down. M4 money supply growth jumped from 9.7% y/y in March 2020 to 22.0% in April, accelerating to 31.0% y/y that June.^[iv] Inflation is a monetary phenomenon—the case of too much money chasing a limited number of goods and services. Deluging the economy with money when available goods and services were severely restricted likely contributed to the rampant inflation of the past two years.

Then, to follow that up, the Fed initially called inflation “transitory”—meaning temporary, although it didn’t slap a time frame on that—only to U-turn and label fast-rising prices “persistent,” requiring rapid rate hikes—an apparent reaction to public and political pressure. Fed officials continue to fret about prices even as disinflation reigned this year amid improving supply issues and the money supply boom fading into the rearview. In a sense, that makes hot inflation look fairly transitory.

Now the Fed appears to want credit for talking to regular people and incorporating their experiences into monetary policy. Call us cynical, but we think it is rather weird to seek credit now for a long-running practice. There is little reason to see this as a sea change and no reason to think it will improve monetary policy. It seems like mere window-dressing and the coverage of it stems from pundits’ excessive emphasis on all things Fed. So as always, don’t overrate central bankers’ views, whether informed by aggregated data or anecdotes. They are (and have always been) imperfect.