What Economic Information Does the Fed Have That the Market Doesn't?
Remarks before the American Copper Council
El Paso, Texas, April 26, 2001

When I spoke to the American Copper Council (ACC) in El Paso in late April, I discussed the Federal Reserve's special insights about the current economic slowdown or, to paraphrase a question that many reporters have been asking me lately: "What did you know and when did you know it?"

In retrospect, it appears that the economy downshifted to a much-reduced rate of growth in September or October 2000. Yet, months later, when the Federal Reserve eased its Federal funds target interest rate from 6.5 to 6 percent on January 3, 2001, it was viewed as a "surprise interest rate cut" because it occurred between regularly scheduled meetings of the Fed's Open Market Committee. The news media immediately began a drum beat of questions about whether the Fed had inside information about weaknesses in the economy that the public did not have.

The Fed's Information Sources

Among the government statistical agencies in Washington, D.C., the Fed is a fairly minor player. In fact, the Fed gets most of its macroeconomic statistics from other government agencies and private sector data suppliers. The Fed produces macro statistics, among them several measures of the money supply, and monthly numbers on industrial production and capacity utilization. The Fed also compiles anecdotal information on the regional economy in each of the twelve Federal Reserve districts, along with a national summary. This 50-page report on the anecdotal health of the economy, called the Beige Book, is released 13 days prior to each of the eight meetings of the Federal Open Market Committee (FOMC). It receives fairly extensive coverage in national newspapers like the Wall Street Journal, New York Times and USA Today. The Beige Book is available on the Federal Reserve Board's website: www.federalreserve.gov [off-site].

I dwell on the Beige Book for several reasons. First, it is a publicly available document that tells, in plain English, a story about what each of the twelve Fed banks is hearing from cyclically sensitive businesses about economic supply and demand conditions facing their firms, industries and local economies. Second, research done at the Dallas Fed and elsewhere, provides strong evidence that turning points in the U.S. and regional economies show up in the Beige Book several months before being revealed in economic statistics, which are released with lags of several weeks to several months, and are often subject to substantial revisions. In other words, the Beige Book is a reliable leading indicator of changing economic conditions. To someone in the copper industrya—producer, user, or recycler—the Beige Book may not necessarily present any new information that wasn't already available from their order book and market prices. However, when your firm's or industry's position is in a state of flux, the Beige Book could provide corroborating information about the extent to which similar events are happening throughout the economy.

Anecdotes vs. Statistics

Over my more than 30 years in the economics profession, I have learned the hard way that when the anecdotes and the statistics are not in perfect concordance, one of them is wrong. More often than not, the anecdotal evidence carries the day. So I tend to place a great deal of reliance on the Beige Book in my attempts to sort out what's really happening in the economy, especially when the statistical readings present a murky picture because of conflicting signs of strength and weakness.

Another reason I focus on the Beige Book is that I become aware of its content for the Dallas Fed's district (Texas and portions of Louisiana and New Mexico) about a week prior to its public release. During this week of editing, my views on the state of the economy become solidified, as I evaluate the Beige Book against a wide range of other economic information.

The Fed's Boards of Directors

The Fed has another very important source of economic intelligence that it has cultivated and nurtured over the years. Each of the twelve Reserve Banks has a nine-member Board of Directors that meets monthly. At each of these meetings (and interim phone meetings as well), the Fed, by law, solicits director input on the health of the economy as part of our legal mandate to send biweekly recommendations on the discount rate to the Federal Reserve Board in Washington. Believe me when I say our directors are not shy when sharing their experience, views, and insights on the economic and financial conditions they face.

In addition to the 12 head offices, there are 25 branches of Federal Reserve Banks around the country. At the Dallas Fed, for example, we have branches in Houston, San Antonio, and El Paso, each with seven directors who provide monthly input on economic conditions. So each month, I hear, directly or indirectly, from 30 directors about changes in the economy.

Part of my job is to summarize the directors' economic input and forward it to Chairman Greenspan and the other Fed Governors for discount rate action. Since the beginning of 2001, the discount rate has been reduced on five occasions by half a percentage point. It now (late May) stands at 3.5 percent, the lowest level in many years. Clearly our directors have been telling the Fed loudly and clearly that economic conditions have deteriorated, that in these circumstances inflationary pressures outside of energy are very subdued, and that the Fed needs to move its foot from the economic brake to the accelerator. Our Boards of Directors have spoken and the Fed has listened and acted.

Unlike the Beige Book, input from our directors is not made public. Rather it has become another source of regular and frequent anecdotal evidence whereby the Fed keeps its "ear to the ground," listening for "straws in the wind" about the "shifting sands" of the economy. But in conjunction with our Beige Book contacts, our directors at the Dallas Fed began telling us in September and October 2000 that the "Goldilocks economy" of Spring/Summer 2000 had begun to cool rapidly. By itself, this information was insufficient to bring about a change in direction for monetary policy. After all, this could have been evidence of the soft landing that the Fed had been seeking. But when the dimpled and pregnant chads kept American consumers glued to their TV sets instead of the shopping mall for 36 days, the political event of a so-called constitutional crisis caused consumer, business and stock market investor confidence to plunge, thereby putting the Fed policy makers on "high alert." Confidence fell further when the lights went out in California. The manufacturing recession began spreading to the other parts of the economy.

Inside and Outside Information

So to answer the question posed in the title of this article, yes, the Fed does have some special economic information not available to the general public. Yet the essence of this information is released with only a few days lag in the Beige Book report, the schedule of which is posted on the Federal Reserve Board's website. Moreover, for a cyclically hypersensitive business like copper, the information contained in the Beige Book is particularly relevant. I use it as an economic reality check. ACC members should too.

About the Speaker Harvey Rosenblum is senior vice president and director of research at the Federal Reserve Bank of Dallas.