"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
–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
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