Fed Official Says Bad Data Helped Fuel Rate Cuts, Housing Speculation

"In this case, poor data led to a policy action that
amplified speculative activity in the housing and other markets.
Today…the housing market is undergoing a substantial correction and
inflicting real costs to millions of homeowners across the country. It
is complicating the [Fed’s] task of achieving…sustainable
noninflationary growth."
Richard Fisher, Federal Reserve Bank of Dallas


One of the reasons I have spent the past few years railing about inflation has been the impact it has on policy and investment.

My critique about the absurd inflation ex inflation was more than merely an abstract rant. When the official data is wrong — whether it is spun or manipulated or tortured (yes, it turns out we waterboard NFP) — it has very real consequences for the Economy.

It turns out that I am not the only on who feels this way. Richard Fisher, President of the Federal Reserve Bank of Dallas, discussed the impact of this bad data on Fed policy last week at a meeting of the New York Association for
Business Economics.

The WSJ picks up the details:

"In an apparent and rare in-house critique, the
president of the Federal Reserve Bank of Dallas said that because of
faulty inflation data, the Fed kept interest rates too low for too long
earlier this decade, fueling speculative housing activity.

A number of critics have said the Fed under former
chairman Alan Greenspan kept monetary policy too easy from 2003 to
2004. But Richard Fisher’s remarks to the  yesterday mark the first time some Fed watchers
could recall a sitting Fed policy maker making such comments.

Mr. Fisher said from 2002 to early 2003, inflation, as
measured by the price index of personal consumption expenditures (PCE)
excluding food and energy, was running below 1%. That suggested that a
serious shock to the economy could turn inflation to deflation, or
generally falling prices. Deflation makes it much harder for the Fed to
boost growth by engineering deeply negative real, that is
inflation-adjusted, interest rates.

To reduce the risk of deflation, the Fed lowered its
target for the Fed funds rate — charged on overnight loans between
banks — to 1% in June 2003 and held it there until mid-2004. It has
since raised it to 5.25%.

Mr. Fisher noted that subsequent revisions show PCE
inflation was actually a half a percentage point higher than originally
estimated. "In retrospect, the real Fed funds rate turned out to be
lower than what was deemed appropriate at the time and was held lower
longer than it should have been," Mr. Fisher said."

In the view of Mr. Fisher, inflation is now about 2.5%, higher than his "comfort zone."  Of course, we cannot expect a total shift by the Fed overnight; the official word is that inflation "has probably  peaked and
is finally heading lower." My own take is that inflation has been softened to somewhere between 3-4%, thanks primarily to reduced energy prices.

The Fed has now unofficially fingered BLS as the bureaucratic entity that very much needs to get its act together when it comes to presneting a data based version of reality. The currently tortured stats we are fed via BLS (and Census for that matter) need to be improved — dramtically, and soon.

That’s a major admission from the Fed — even if it is just one rogue Federal Reserve Bank President. 

For his forthright acknowledgment of what we previously knew to be true, and
his valiant attempt to correct this egregious error, I hereby retire
the moniker 8th Inning Fisher, and replace it with "Richard the Truthseeker."

Thank you for your efforts. Go join your fellow knights at the round table.


Fed Official Says Bad Data Helped Fuel Rate Cuts, Housing Speculation (public)
WSJ, November 3, 2006; Page A6

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What's been said:

Discussions found on the web:
  1. jab commented on Nov 7

    Barry, Get real – If you knew the data was bad and especially if I knew they HAD to know it. This is just a CYA blame the other guy for bad policy decisions. The fact the data was bad had ZERO impact on policy because they KNEW it was bad.

  2. Leisa commented on Nov 7

    I’ve been a watcher in my local market on trustee sales, and I’ve posted here some of my observations. Today was a true shocker. In the past, I’ve noted that foreclosures over $90K were not the norm. So I decided to keep track. Only only have 5 weeks of data, so I know that doesn’t mean a damn thing…but in these last 5 weeks, I’m noting that rather than a $90K cut off, I should have another tier for 190K. Well, today (and it’s not my Friday measurement day!), I noted the following–the count above $300 is dumbfounding. These numbers used to be aberrations. NEVER, NEVER have I seen this many $300K. Even more surprising, is to see this high count AND to have a $400, $600 and $700K listing all on the same day. Absolutely dumbfounding in my area. While Greenspan thinks the worst is over…maybe it is for the homebuilders, but for lenders, I believe it is the beginning.

    Count 22
    Median 80222
    Average 190189.5923

  3. Bob_in_ma commented on Nov 7

    “That’s a major admission from the Fed…”

    Barry, no it’s nothing of the kind. It’s passing the blame.

    The Fed mindlessly let another asset bubble grow under their watch and all but cheered it along. Now when the dire consequences they assured us wouldn’t happen are happening, Fisher’s passing the buck.

    You’ve totally misread this.

  4. brion commented on Nov 7

    agree. “Bad data” sounds like “Bad intelligence’s” bad cousin.

  5. Mike_in_Fl commented on Nov 7

    I agree that Fisher’s comments are a START. But then today, I read in a Washington Post story forwarded to me, the following comment:

    Greenspan disputed such criticism, saying the recent housing boom resulted not from Fed cuts of short-term interest rates, but rather from global financial conditions that lowered long-term mortgage rates worldwide. “In retrospect, I know of nothing we would have done differently,” Greenspan said of Fed policy during those years.

    The chief architect/enabler of the housing bubble says Fisher has it all wrong. It’s the bond market’s fault. Recall recently that Greenspan essentially blamed the fall of the Berlin Wall for the housing bubble too.

    I make mistakes in the market all the time. We all do. But the best of us ADMIT the mistakes and try to learn from them. Most Fed members “ex-Fisher” appear unable to do so.

    Oh and speaking of housing, don’t miss the latest new ORDERS figures out of BZH, TOL, and especially WCI this morning. WCI actually had net NEGATIVE orders in its condo/tower division as cancellations outweighed gross orders. BZH and TOL orders got much worse sequentially as well — with BZH going from a 15.8% YOY decline in the June quarter to a 58% YOY decline in the September.

    If the housing market is truly turning, as conventional wisdom holds, it’s NOT yet showing up in the new orders data. Orders trends are just getting worse. Last week, the MBA’s purchase app index also sunk to a new cycle low. If that fails to reverse this week or next, then you’ve got yet another data point arguing for ongoing weakness.

  6. Robert Coté commented on Nov 7

    And yet they are using the exact same data in exactly the same way to justify keeping current rates steady. Let’s just admit that the Fed process is conclusion first then search for supporting data. Failing that either make up data and/or ignore the contradictory data.

    Mr. R, if you came up with a reliable inflation index that includes inflation people would pay for it. Then once a month you could appear on the Financial Entertainment Network and compare your number to the Fed’s fiction.

  7. Q-Ball commented on Nov 7


    You are correct that I have posted under QW and APEX in the past. I didn’t like those handles and settled on Q-Ball. I have been consistent with the lastest one since starting to use it and don’t intead to change it. There was no attempt to change my style or persona by using multiple handles. Sorry if it appeared I was trying to be deceptive by using different names.

  8. calmo commented on Nov 7

    I think Bob has a point about this being only an appearance of responsibility/accountability by Fisher and, so far, only an appearance. (How long would you sit on your hands with ‘bad data’?) No, it’s apparently those lenders who acted irresponsibly and did not practice due diligence…and took advantage of low interest rates.
    Fisher, the TruthSeeker, has a penchant for the limelight, an irrepressible need for recognition irrespective of his well-studied Coles Notes or any other measure you care to cite that might persuade us to listen to him. The performance, Fisher The Entertainer, is out-performing the substance, Fisher the Bank President, IMEvasohumbleO.

  9. eightnine2718281828mu5 commented on Nov 7

    Greenspan used to spend a lot of time crowing about the flexible American workforce, which helps us compete effectively with foreign labor.

    Unfortunately, I don’t recall him discussing how inflated housing costs would affect American labor’s competitive position in world markets.

  10. km4 commented on Nov 7

    Right…. place the blame on poor data not the policy makers.

    Incompetent Asshats !

  11. D. commented on Nov 7

    I’ve been so incredibly bored for the last few years.

    As soon as you pinpoint the bubble, all you can do is wach it grow and grow. Then, you sit there, waiting and waiting, witnessing more and more irrational behavior knowing fully well what awaits the last fools in.

    The only intriguing thing left after a few years is finding out how our leaders will dig themselves out of the hole.

    And we’re finally there! They’re finally picking up their shovels, because we can’t call it a spade, and the dirt is finally starting to come out!

  12. Philipp commented on Nov 7

    I believe we should support people like Moskow and Fisher, who emphasize on the need to cut back inflation and who admit that they made mistakes.

    Unfortunately most of the people still listen to AG: “We saw housing stabilizing…”

    As less and less people believe that, less and less may believe in colorful paper called money, which in case will lead to even higher inflation.

  13. S commented on Nov 7

    Fischer’s criticism of unreliable data is certainly justified.

    But Greenspan is also right. Japan maintaining rates barely above 0% (which continues) only faciliated the global carry trade and encouraged global specualtion in search of yield.

    And thanks to the American consumers insatibale desire to consume anything Chinese, the Chinese central bank found itself with several hundred billion dollars. What else could they do with those greenbacks but buy treasurys? So, when the FED realized it made a policy mistake pushing rates too low, the long end of the curve didn’t respond to the FED kept tightening do to all that Chinese buying. That kept mortgage rates “artifically” low.

    There’s plenty of blame to go around. It’s not entirely all TheMessThatGreenspanMade. All the world’s major central bankers, together with the American consumers inability to restrain consumption, contributed to the mess.

  14. BDG123 commented on Nov 7

    Looks like wrong way Fisher is at it again. I don’t want to write a novel but I think there is a very valid argument that his conclusions are highly erroneous.

    His search for truth is admirable but he really should shut his trap. He’s part of an organization whose job it is to calm markets, not create turmoil.

  15. Kevin Rooney commented on Nov 7

    Is the Fed driving up stocks by flooding the market with liquidity because it is trying to fight off the unfolding housing/mortgage crash that many are not yet acknowledging the severity of?
    If they are feeding out extra liquidity, is there a specific data source where the average person could monitor that?

  16. jab commented on Nov 7

    BDG123 – I am not sure thier job is to “calm markets” – I think it is more to run monetary policy – they should quit trying to manage the markets that is why we keep getting asset bubbles.

  17. Teddy commented on Nov 7

    I’ve often wondered whose best interest Alan Greenspan represented when he was Fed chairman, the people of the United States of America or the global world bankers, who believe it or not, paid his salary every year!

  18. foo commented on Nov 7

    Last words captured on voice recorder.
    Pilot to co-pilot: “The instruments said I was straight and level. It was bad data.”

    In flight school the default answer when assigning blame for a mishap is “pilot is always responsible”. Same is true of the FED. Fisher’s analysis is BS.

  19. DavidB commented on Nov 7

    I think they are waiting for Greenspan to drop dead so they can start pointing the finger at who is truly to blame.

    I still can’t get over how, the minute Greenspan was out of power, the whole world started lifting rates again. I still believe that behind closed doors he threatened to pump money out like crazy if they tried to raise. Facing this shotgun aimed at them the CBs of the world just chose to bide their time until ‘the crazy guy in Washington’ was escorted safely from the building.

    We may never know but I’m hoping tongues start flapping when old Greeny goes to his final place. There might be a few books written before this is done

  20. Bob A commented on Nov 7

    Was it faulty data though, or were the people in charge just idiots? No need to answer.

  21. James commented on Nov 7

    The article on the page of the WSJ about the fed was really frightening. How could they not have seen this scenario coming? And why do they continue to turn a blind eye to asset bubbles? I’m really worried what the consequences could be when growth cools. The fed has no idea what its doing and is flying blind just like the rest of cb’s and the global economy in general. Is it fair to assume that we could a MASSIVE credit event at some point. Leverage is huge in almost ever asset class.

  22. tjofpa commented on Nov 7

    Like Martin Sheen I just have to LOL.

    Them says that they got faulty data from the Gov’t whilst they withholds the most important inflation data on the planet.

  23. ari5000 commented on Nov 7

    Election is over.

    Powers-that-be have no more reason to prop up this bloated equity market. Time for reality to set in.

    NY Times had an article today about housing in Arizona — front page. Thousands of unsold homes sitting around now… they expect immigrants to buy them all and cushion the fall in prices.

    When you’re relying on immigrants — mostly earning minimum wage — to prop up the U.S. economy — I think that’s hitting rock bottom. Sure — they’ll be happy to pay the median house price when there are 40,000 unsold homes collecting dust…

  24. Teddy commented on Nov 7

    When Congress gave Fannie and Freddie their good housekeeping seal of approval a couple of months ago, stating they did no wrong, that paved the way for more of these loans to immigrants and others that are no money down with negative amortization and no documentation of income, the same type of loans that created this bubble in real estate to begin with. If these loans weren’t insured by the government, who in the hell would make them and who would purchase them? Nobody, not even foreign central banks. Unbelievable!

  25. S commented on Nov 7

    HOV just provided preliminary 4Q guidance. Out of the 4 or 5 HBs I follow regularly, they win the prize for the largest single quarter impairment of land and writeoff of land options. They expect the total charge for the quarter will be around $300 million in 4Q.

    That charge also means HOV wins the award for being the first builder I follow that will actually report a quarterly loss this cycle.

  26. oldprof commented on Nov 8

    There is one problem here — the PCE comes from the Department of Commerce, not the BLS (Department of Labor).

    Also, the changes in the index come from “benchmark revisions” as real data replaces provisional data. It is not some conceptual error of the type raised by critics of inflation measures.

    Barry has often opined that the BLS birth/death model over-counted new businesses, based upon his personal opinions of people who start new businesses. In fact, when the actual employment count from the states came in, the birth/death model under-estimated new business growth.

    There is often no good way to get the data we want at the time we want it — a topic I have discussed extensively on my site.

  27. Teddy commented on Nov 8

    oldprof, if you want the real deal data, ask your wife, girlfriend, boyfriend, whoever buys the groceries to moniter prices. If you or your loved ones haven’t had to use health services recently, ask your friends about health care costs. Ditto apartment rents. Ditto tuition costs. Ditto costs on any services or products that haven’t been outsourced, tho outsourced products are rising also. Ask them about the quality of jobs being created, not the quantity as if this can be believed anyhow. The people of this country are asking for change, but not the slick Willie style that gave us Monica Lewinsky and NAFTA, which destroyed US jobs and never led to any significant formation of a middle class in Mexico.

  28. VennData commented on Nov 8

    The Fed officials are setting up the plausible deniability when the economy turns down. This will allow them to rhetorically slither out of responsibility during their book tours and cocktail party jabbering.

    The finger pointing will be aimed at the birth-death model jugglers at the BLS. Then, as the Democrats set up investigative committee after investigative committee the GOP will be shouting “political vendetta” as the political machinations of BLS gets about as much attention as the 9/11 commission report.

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