The Joy Of Reading The Minutes Of The Federal Open Market Committee

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The FOMC minutes are like most other documents produced inside the government’s bureaucracy. The bulk of the information has been gathered long before the report reaches the public. In the case of the Fed’s minutes some of the data, particularly information on GDP, unemployment, and production, are several months old. The Fed feels the need to add them for the sake of context.

Halfway into the minutes for the April 29 to April 30 meeting are the projections of the Federal Reserve Governors and Federal Reserve Bank presidents. These figures are more than three weeks old, and they paint a remarkably pessimistic portrait of where there economy will be over the next several quarters. Most of the rhetoric that comes before them in the document covers small hints that the Fed has observed in the economy that would lead the reader to believe that a recovery is imminent. The forecasts say otherwise.

The Fed has a strange habit of collecting opinions from the committee members and then throwing out the three highest and three lowest projections for each variable in each year in the forecast. That process yields what the agency calls “the central tendency”, a sort of consensus about what the future holds excluding opinions that are radical based on the fact of their exclusion.

The central tendency figure for GDP this year shows the best case being a contraction of 1.3%. The figure that is the most negative is as bad as a 2.5% GDP drop when the most pessimistic view is added back in. It is worth noting that the consensus predictions for GDP are notably worse in the April numbers than they were when the FOMC met in January.

The figures for unemployment are depressing. The best case in the central tendency is that the jobless rate will top out at 9.2% this year, not much higher than it was at the end of April. The pessimistic case that is thrown out in the process of reaching the consensus number is 10%. Someone involved in the meeting has an unusually bleak view of the year. The worst prediction for 2010 is that unemployment will be 9.6%. That means that nearly 10% of the work force could be looking for jobs for several quarters. The level would be unprecedented in recent history. The worst prediction for 2011 is that unemployment will be 9%.

As a rule, economists believe that improvement in unemployment trails GDP recovery. The rules may not apply in this recession. A protracted period of unemployment may have unexpected consequences. These could include a prolonged drop in real estate values as more people are forced to leave their homes and a significant period of extremely poor consumer confidence and consumer spending. The FOMC document does not take into account the fact that oil is now above $60 a barrel and that, despite predictions that a surfeit of supply will bring it down, the price continues to rise fairly rapidly.

The Fed and members of the Administration seem keen on the idea of identifying every piece of data about the economy that is not negative as positive. No data are neutral. What is not bad has to be good. The FOMC practice of throwing out figures that are at the extreme of the predictions from its experts feeds into the same expression of encouraging a perception that the economy is improving, even if it is only in tiny steps. The trouble of relying on averages is that what each of ten or twenty people say may not be equally true. Some people are smarter than others. Some people are particularly well-trained. Some spend more time looking at relevant data. Averages end up being an especially mediocre way of making forecasts, but the averages are what the public sees.

Douglas A. McIntyre

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