Anyone who has ever worked in a large organization knows that the underlings are frequently overruled by the higher-ups. The Federal Reserve is apparently no different.
A piece in today’s Financial Times, “Fed minutes bearish on growth,” reports that Fed staffers foresee continuing economic weakness, which in turn made them more sanguine about inflation than the FOMC, at least based on reports issued today (“Fed Policy Makers Agree Next Move on Rates Will Be an Increase“).
The FT report says that the staff economists see inflation continuing to rise for the balance of the year, then falling in 2009 as the result of slack conditions. That would suggest the correct course action is either do nothing (which is the Fed’s current posture) or make an immediate, small increase (more symbolic than real), then do nothing (although hawks will argue that even with the economy sputtering, more aggressive action is needed. Personally, I’d wait to see for more data and anecdotes from China, for if its growth slows markedly post Olympics, that suggests a different course of action than if they go back into high gear).
However, in fairness, the Fed’s decision was close, which means despite the firm public tone, it is probably more subject to revision than usual in the face of new data. Cynics might also contend that the Fed in fact intends to stand pat, that the announcement is mere bluster to talk the market down. Perhaps, but the degree of disclosure now in operation at the central bank may make that sort of gamesmanship more difficult to orchestrate.
From the Financial Times:
The staff economists of the Federal Reserve presented a bearish growth forecast at the US central bank’s last meeting on August 5, minutes of the meeting revealed on Tuesday.
The Fed staff cut their forecast for growth in the second half of 2008 and in 2009, citing a weak jobs market, unfavourable financial conditions, a lack of consumer and business confidence and falling manufacturing activity.
Meanwhile, the staff forecast that core inflation would “pick up somewhat in the second half of this year” then “edge down in 2009” as the impetus from past increases in commodity and import prices faded and widening economic slack moderated price pressures…
There was extensive discussion of the danger of a renewed credit squeeze and a negative feedback loop from the financial sector to housing and back again…
While some [policymakers] thought the risks to inflation had eased with the decline in oil, others thought the risks to inflation had increased, and “a number worried about the possibility that core inflation might fail to moderate next year” unless interest rates were raised sooner than the market was expecting.
But the US central bankers made it clear that they would not move rates higher without regard to economic risks….
However, the Fed was divided as to how great a danger this posed to the economy. Many Fed officials believed the worsening of the financial pressure would “restrain aggregate demand and economic growth.”
But some thought “the extent of such adverse effects was likely to be limited” since bank credit had continued to grow at a moderate pace and both consumer and business spending had expanded during the second quarter in spite of tighter credit terms.
Someone did a study and found the staff were more accurate than the board and recommended the board listen to them.
As usual, awesome Fed reporting from Krishna Guha of the Financial shows once again that he is easily
the best Federal Reserve beat reporter in the world, for a variety of reasons.
Not only does Krishna take the time and care to cultivate relationships at the highest level of the Fed in New York, he has ALSO put forth the
extra effort to be in close touch with the various senior economists
at the Federal Reserve BRANCHES, rather than just parroting what
the St. Louis and New York (and occasionally Dallas) branches have to say.
This gives him the insight to report that, as anyone who has
worked at senior levels in the Fed knows, the Fed is a highly
diverse group of people continually engaged in lively debate.
For those who snicker at such views and proclaim from the rooftops
how much they know about what the Fed is ACTUALLY discussing
and planning, I simply ask, in a humble fashion, that they
suspend their ridicule and carefully continue to read
Mr. Guha’s meticulous reporting on the Fed,
regularly appearing in the Financial Times.
He’s a reporter’s reporter, from
the old school, and we can all
benefit from his diligence and care.
Any organization is built up from the bottom. Not only do these “middle managers” do the work that is “interpreted” by the “managers” they also have the ability to shape policy.
Read about the law clerks of the US Supreme Court. Those 25 year olds shape the entire nation by choosing which case is heard. Why would the Fed be any different. The best and the brightest fight to add the Fed to their resumes. Why wouldn’t they have a firm grasp on the reality of the economy?
These are good points Michael. And junior economists at the various branches compete for promotions by publishing helpful papers in the local Economic Reviews that are a must read for serious Fed watchers.
Believe me, senior management READS these articles and is fortunate to have some brilliant new, young talent with innovative ideas.
And certain Fed branches are on the “fast track” for promotion. And the St. Louis branch is clearly, in my book, no longer in that fast track and they still don’t understand why.
Perhaps now that Poole has finally left they will get a clue.
But that seems unlikely.