Anecdotes at the Federal Reserve

The Federal Reserve occupies a special pedestal of authority and competence in the arena of governmental bodies charged with economic policy. Compared to Congress, it acts with amazing unity and speed. Moreover, compared to Congresses’s shortsighted and often political settlements, the Federal Reserve tends to make calculated, strategic decisions with an close eye to their long-term ramifications.The tendency of investors and analysts to hang on very last word of the Chairman’s public statements evidences the delicately crafted nature of its policy. However, in moments of crisis, even the ordered, empirical world of the Fed policy-making can be turned upside down. Transcripts of Federal Open Market Committee (FOMC) meetings from the lead-up to and explosion of the 2008 financial crisis reveal that  although the underlying rationality and conviviality of the Federal Reserve’s decision-making process remained, the situation’s suddenness and urgency forced the Federal Open Market Committee away from the empirical realm of data towards anecdote and conjecture. In these transcripts, the FOMC investigates just how valid and relevant this type of information should be in their decision-making. In a broader reading, they recount a struggle define the boundaries of economic rationality.
Anecdotes provide insight into real time conditions because no delay is experienced collecting and analyzing data. Further, they facilitate the construction of a cohesive and convincing narrative, a window through which to understand and characterize the dynamics of a complex system. A convincing, gripping narrative of “the economy” is much more difficult to construct from abstract statistics alone (although statistics are certainly useful in this process). These selections from the extensive FOMC transcripts reveal the  surprisingly diverse set of anecdotes they draw in with a wide net of personal connections and contacts:
MS. [Janet] YELLEN [in 2008, President of Federal Reserve Bank of San Francisco].
In one example, the CEO of a bank in my District reports that several of the nation’s largest mortgage lenders have suspended withdrawals from open home equity lines out of concern that borrowers could now owe more than their homes are worth. As a final anecdote, a banker in my District who lends to wineries noted that high-end boutique producers face a distinctly softening market for their products, although sales of cheap wine are soaring. [Laughter]
MR. DUDLEY [President of Federal Reserve Bank of New York].
I have just sketchy details based on a phone call, so this may not be quite right. But my understanding is that this morning Norway put in place a facility by which they are going to offer their banks dollars, up to $5 billion, on a one-week term—sort of an open facility. The fact that Norway is doing this suggests that the situation has broadened quite a bit further because this is the first time that we have heard about Norway in this story, except for maybe some exposures to the Icelandic banks.
Mr. Lacker’s comments after reporting the conditions in his district overviews the value of these stories to the committee:
MR. LACKER [President of Federal Reserve Bank of Richmond].
I spent a bit more time than usual on our regional picture because right now I am placing a bit more weight than usual on our District reports and what I read in the Beige Book. One can be skeptical about the incremental value of anecdotal reports in typical times, but at times like these, I believe they can and do provide a more timely read on what is going on. These regional reports have shaded my outlook to the downside relative to the picture painted by the national data, which is itself a somewhat discouraging picture.
In August of 2008, Chairman Ben Bernanke and Mr. Fisher directly confronted the role anecdotal evidence should play in context of data that might be old or not completely relevant. Also, the essential role of anecdotes in constructing a narrative against the backdrop of data emerges in their discussion.
CHAIRMAN [Ben] BERNANKE [in 2008, Chairman of Federal Reserve].
President Fisher, I’m going to ask you a very innocent question. You’ve given many chilling anecdotes over the last few meetings about increases in prices, but the official statistics just don’t show anything like that outside of oil, gas, gasoline, and the direct commodity price increases. Do you believe that the CPI is not an accurate measure?
MR. FISHER [President of Federal Reserve Bank of Dallas].
Well, I do see the CPI rising. The monthly report was not encouraging. The last 12 months have not been encouraging, and I think what worries me is the spread between core and headline. Core is rising as well, by the way. Even our own estimates indicate that. I do see it in headline numbers. The numbers I saw that were just reported I thought were quite alarming. You are seeing the pass-through. You’re hearing evidence of this in the anecdotal reports. I do believe, Mr. Chairman, that it’s visible in the data. I’m just trying to report what I’m hearing from the field against the background of much more sophisticated analysis, which I respect enormously. What I’m worried about is the perception. I do believe that the data are very imperfect on inflation expectations.
By the end of 2008, committee seems to have reached a consensus that, although no single anecdote should color their narrative, that in the absence of relevant hard data, an array of diverse anecdotal evidence can and should provide guidance for immediate, urgent decisions. A valuable trove exploited to guide policy, but also can prove a quicksand and false steps. As Mr. Fisher pointed out in January of 2008, the Federal Reserve’s consideration of anecdotal evidence is “almost cheating on the data” (70). He goes on to caution against submitting to the emotional power of these stories, describing them as dramatic “tales of woe” (71). In the eyes of the FOMC, anecdotes inhabit a gray area between groundless reckoning and sound economics.

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