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What did the Fed know, and when?

Posted by: Michael Mandel on February 12

Readers of my stories and blog will know that I am obsessed with the quality of the government statistics. Very often mistakes in economic policy can be traced to data which is misleading or later revised.

One of the big puzzles is why the Fed kept raising rates in 2006, despite what we know now was the incipient weakening of the housing market. The minutes of the January 31, 2006 FOMC meeting, indicate a slight bit of concern with the housing market, but nothing significant: “Activity in the housing market appeared to continue at high levels.”

Here’s one reason why the Fed got it wrong: The NIPA data was giving them totally the wrong picture. According to the latest numbers at the time, housing investment was accelerating at the end of 2005. In reality, we now know that housing investment was sharply decelerating going into the January 2006 Fed meeting.

Take a look at this chart.


The dark blue line is the real growth rate of private investment in new residential structures in 2005, as of the January 27, 2006 GDP report (available, obviously, before the FOMC meeting). The light purple line is the current estimate of the real growth rate of private investment in new residential structures.*

Guess what? They look like they come from completely different economies. At the time of the Fed meeting, they had no idea that they were in the middle of a sharp collapse in the housing market.

Let me extend the current estimate a bit


In retrospect, would the Fed have kept raising rates in 2006 if it had the correct data about the collapse in housing investment in late 2005? Perhaps not.

*The data comes from the bottom line in table 5.3.6. The January 27, 2006 data comes from the February 2006 Survey of Current Business.

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Reader Comments


February 13, 2008 05:08 AM

There are tons of literature
(for example,
scrutinizing every tiny detail of the problems, including those related to monetary policy, associated with high uncertainty of contemporaneous economic measurements and unpredictability of the size and direction of future revisions.
In this situation, I would not blame people who take great responsibility of making any decision. They deserve more respect in view of their reputation on stake without any clue what would be the realization of the economic process, which is currently considered as stochastic.

I have two questions, however.
1. Could we possible improve on the accuracy of current measurements or, as first step, to identify the sources with largest uncertainty.
2. May be one should invest more time is studying deterministic component of the economic evolution in order to minimize the influence of inaccurate measurements .


February 13, 2008 05:13 AM

Somehow the document I have mentioned two times before was moved to


February 13, 2008 04:57 PM

This is all the more reason to let Milton Friedman's laptop run monetary policy and get rid of the egois fine-tuners at the fed. Monetary policy under "The Maestro" was like a drunk weaving down the road bouncing from ditch to ditch.

Mike Mandel

February 13, 2008 05:04 PM

Did Dr. Friedman have a laptop?

I get your point. It's hard to believe that this is optimal monetary policy.


February 14, 2008 09:33 AM

"Money is too important to be left to central bankers," Mr. Friedman says. "You essentially have a group of unelected people who have enormous power to affect the economy one way or another."

His proposal is simple: "I've always been in favor of replacing the Fed with a computer." In essence, a PC could determine the economy's monetary base and consistently increase it by, say, 3 percent annually. "That amount of money would be created and distributed, either by buying up government securities or by financing current government expenditures," Mr. Friedman explains. "It would do that week after week, month after month, hopefully year after year."

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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