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Saturday, February 22, 2014

Beating Up On The Fed

The transcripts for Federal Open Market Committee (FOMC) meetings for 2008 were released, giving economics blogs lots of material to work with. As one would suspect based on the outcome, policymakers did not have a good idea of what was going on.

I will confess that I have not read the full transcripts, rather I have seen a few excerpts. None of the excerpts were particularly surprising. What has to be kept in mind that this is not just some government bureaucrats being wrong; few in the private sector accurately diagnosed the recession either at that time. This is despite the fact the recession is now considered to have started in December 2007. For example, one street economist warned in mid-2008 that oil was going to $250/barrel, and that the Bank of Canada was going to be hiking rates by the end of 2008 in response (even in real time, I considered that to be one of the worst fixed income calls that I could remember).

Dean Baker gave a harsh but fair assessment:

It's great to be an economist in a top policymaking position in the United States. Unlike dishwashers, cab drivers, and most other workers, you are not held accountable for the quality of your work. We already knew that, since almost none of the people responsible for allowing the housing bubble to grow large enough to collapse the economy have paid any career price. (Ben Bernanke is praised for avoiding a second Great Depression. Talk about setting the bar low.)
This apparent lack of accountability is why I think the whole academic fad about forward guidance and expectations management can be safely ignored.  If central bankers cannot diagnose a recession that has already started, why would you believe their statements that they will not need to hike rates for years? If they are wrong, they suffer no ill consequences. Conversely, if you are a portfolio manager, you may end up needing to examine new career options.

Luckily, the automatic stabilisers of the Welfare State work without the input of economic forecasters.

(c) Brian Romanchuk 2014

1 comment:

  1. Not surprised by this, I used to work at a central bank.


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