Fed Won’t Share Internal View Underlying Risks
By Craig Torres - Oct 27, 2011 12:01 AM ET
Bloomberg.com
At BNP Paribas SA’s New York trading desk, Julia Coronado, the bank’s chief North America economist, watched as three words helped undermine the Federal Reserve’s latest attempt to aid the U.S. economy: “significant downside risks.”
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Before they acted last month, members of the Federal Open Market Committee saw far more specific predictions. They had “the Teal Book,” an economic forecast that Fed Chairman Ben Bernanke’s staff of 50 or so Ph.D. economists produces every six weeks -- with numeric forecasts for unemployment, growth and inflation down to the decimal point. The document, so influential it’s been called the “13th member” of the 12- person FOMC, is withheld from the public for five years -- unlike the forecasts of other central banks.
Without such specifics, Fed watchers like Coronado, who keeps a rubber Bernanke doll taped atop her computer screen, are left to parse the qualitative language of Fed statements. Last month, investors decided the words meant it was time to buy bonds and sell stocks; the Standard & Poor’s 500 Index closed 3 percent lower that day.
‘Scary and Confusing’
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“Just as the governors should have some accountability, the staff should have some accountability for its work,” said Alan Blinder, a former Fed vice chairman and now a Princeton University professor. “I have always argued that the staff forecast should be public.”
Federal Reserve spokesman David Skidmore said the committee hasn’t considered the question of whether to publish the staff forecast. “Policy makers’ own economic forecasts, rather than those of staff, form the basis for monetary policy decisions,” he said in an e-mail. Their views on the outlook are reflected in the minutes of every FOMC meeting, he said.
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“What does the Fed know that we don’t know?” he said. “Two things. They know where the economy is better than anybody else. Nobody has the same firepower and access to data. Second, they know themselves, and how they’re going to react. Their job would be so much easier if they would help the market understand what they are trying to do.”
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“If the markets are left with uncertainty about what the Fed can do and what its outlook is, this is the reaction you can expect to get,” said Perli, now managing director at International Strategy & Investment Group in Washington.
The full article contains a lot more: http://www.bloomberg.com/news/2011-10-27/fed-refuses-to-share-internal-view-traders-see-underlying-significant-risk.html
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