Thursday, May 21, 2015

Fed: Your Tax Dollars at Work
The Federal Reserve System employs hundreds of economists. Most of them work in the research departments of the Board of Governors in DC and in the 12 district banks. What do they do all day? A few spend most of their time providing an assessment of the economy that is summarized in the FOMC’s minutes. Most seem to write academic research papers that don’t seem to have much relevance to running monetary policy. They are very academic in nature, and mostly irrelevant for policymaking purposes.

I’ve spent some time scanning the papers posted on the Fed’s various websites from 2006-2008. Virtually none examined the credit excesses that set the stage for the financial crisis of 2008.

Nevertheless, there recently have been a few studies by the Fed’s staff that have some relevance to issues that actually matter:

(1) Picking on Piketty. Four Fed economists recently coauthored a paper titled “Measuring Income and Wealth at the Top Using Administrative and Survey Data.” Their conclusion will warm the hearts of those of us who believe that the income inequality arguments made by socialists like Thomas Piketty are based on questionable data and faulty analysis. I made a similar point in the 3/26 Morning Briefing:

(2) Season’s greetings. Did some “residual seasonality” distort Q1’s real GDP? That’s the hot debate among the economists at the Bureau of Economic Analysis (BEA), the FRB-SF, and FRB-DC. Why is this technicality important? Well, the data-dependent Fed is relying on GDP and other economic indicators to determine when to start raising interest rates.

Real GDP rose just 0.2% (saar) during Q1. An analysis by the FRB-SF concluded that it actually might have been more like 1.8%. On the other hand, FRB-DC research points to a lack of “firm evidence” to support the former’s claims. Interestingly, the BEA itself is unsure that its algorithms are performing as intended. The problem largely centers on the unexpected impact of aggregating a significant amount of bottom-up data. Thus, the BEA is reviewing its methods for possible revision in July of this year.
(Based on an excerpt from YRI Morning Briefing)

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