The beige book

Before every meeting of the FOMC (at which the Federal Reserve sets interest rates), the Federal Reserve releases the "Beige Book," a survey of economic conditions in the twelve Fed districts. The release is a guaranteed headline in the business section of your local newspaper. But I've never found the beige book to be remotely informative or interesting. This week's beige book, for example, reports that

Most Federal Reserve Districts reported modest expansion in economic activity since the last report, but several Districts noted some slowing. For example, New York characterized growth as well-maintained but with a few signs of deceleration. In addition, St. Louis said that activity increased more slowly than in the previous period, Boston reported some softening, and Dallas said economic activity continued to decelerate. On the other hand, Philadelphia reported economic conditions improved slightly.

and then backs these vague statements up with lots of generalities and anecdotes. Furthermore, the focus on the performance of individual regions adds noise to the report - it's hard to judge how much of what we're seeing relates to aggregate macroeconomic conditions (over which the Fed has some control) and how much relates to region-specific phenomena (over which the Fed has little control).

It would be more useful if the Fed released its Greenbook, also put together before every FOMC meeting. The Greenbook provides specific two-year-ahead forecasts for GDP, inflation, unemployment, and other variables, assuming the current stance of monetary policy continues. If we had that report, we could make sound inferences about the Fed's upcoming interest rate moves. For example, if the Greenbook projected an increase in inflation from 2% to 4% over the next year or two, we could be sure that the Fed would start raising interest rates, if not right away then in the near future. This would provide useful information to financial markets which could price the forecasts into bonds and stocks, enhancing efficiency and reducing price and interest rate volatility. And there's precedent for releasing this type of information: the Bank of England and other central banks publish their forecasts regularly. The Fed, by contrast, releases the Greenbook only after a five year delay, and then makes the raw data available only through a freedom of information act request.

Why isn't the Fed more forthcoming about its economic forecasts? There's a vast literature in macroeconomics that tries to answer this question using game theory and/or dynamic optimization models. Some possibilities in plain language: (1) if the Fed publishes its forecasts, it's accountable for their accuracy. The Fed, like any good bureaucracy, does not like to be held accountable (it would always like to be able to claim that the recession we're heading into is due to unforecastable events beyond its control, and we're damn lucky to have the Fed around to bail us out yet again); (2) if the Fed publishes its forecasts, its forecasters may come under political pressure to tilt the forecasts one way or another. Suppose the Greenbook forecast for the budget deficit, tax revenues, economic growth, etc. was significantly different from that of the CBO or OMB - would there be pressure from the executive branch or Congress to 'revisit' those forecasts to make them come out right? (3) if the Fed publishes its forecasts, its hands will be tied in terms of making interest rate decisions. For example, the forecasts might suggest inflation is rising, but the Fed might nevertheless be reluctant to raise interest rates because of the possible effect on the value of the dollar or world financial markets. But if the public sees the forecasts and sees that the Fed is not responding accordingly, the Fed will suffer damage to its reputation for competence. Best keep your cards close to the vest and be judged on outcomes, not process.