graphic courtesy of Shadow Government Statistics
This is why its so important to accurately report economic data for policy makers:
In theory, the Fed (looking at that blue line) could have both cut sooner where appropriate and raised rates sooner when signs of inflation became apparent. Instead, they relied on modeled data that was faulty. Hence, our current situation.
UPDATE: May 8, 2008 4:08pm
Angry bear states that SGS’ GDP estimates radically understate growth, and I do not totally disagree with his assessment.
The SGS data is an extreme measure of inflation and growth, and I am not suggesting that model is perfect, or even very precise. However, we do know that BLS tends to go the opposite way, understating inflation and overstating growth. Reality likely lies somewhere in between the two — real GDP growth in the 1980s and 90s, punctuated by the 1990 and 2001 recessions.
I have been arguing that the growth this cycle was significantly inflated. The Economy was reflated with cheap cash and plenty of credit. Hence, the overstatement of growth (and its more of a knock on the Fed Chief at the time than the President.