By Sarah Foster
This is the continuation of a multi-part series on the Federal Reserve System Beige Book. Read the previous article: “Content simple, but impact significant for Fed’s Beige Book report”
Bill Bergman isn’t a stranger to Beige Book skepticism.
The former research economist for the Federal Reserve Bank of Chicago knows the report that summarizes economic activity by industry across each of the 12 regional Federal Reserve districts is often discredited by other economists or colleagues because it relies upon anecdotes instead of numbers, information that may be based on a person’s emotions or opinions rather than data or statistical evidence, he said.
Still, Bergman’s support for the document that consumed the first five years of his 13-year career at the Chicago Fed remains unwavered. Fieldwork, he said, is useful.
“It’s not sitting behind a computer doing your equations and progression models,” Bergman said. “It’s getting out and talking to people and asking them what’s going on. Real business people are in the line of fire.”
Economists, however, are divided about how necessary or impactful the qualitative research report published eight times a year by the regional Fed banks should be. Some economists distrust the intent of the Beige Book altogether, a purpose that the Fed describes as an opportunity to identify variations in regional economies and emerging trends not yet apparent in data. Other economists, acknowledging the Fed’s goal of nonpartisanship, wonder whether anecdotes are truly free from error and bias.
“Humans are humans, and everyone is living in his own environment,” said Alan Blinder, an economics professor at Princeton University who served a year-and-a-half term as vice chairman of the board of governors, the Fed’s governing body. “That’s why you want to think of the Beige Book as a minor influence on monetary policy compared to national statistics.”
Economists are always skeptical about information based on anecdotes rather than data, said Bill English, finance professor at Yale University who has served different positions on the board of governors for more than 20 years. The skepticism is not specific to the Beige Book but to all reports of qualitative nature, he said.
As the Internet and others forms of electronic communication have become more prominent, regional reserve banks have been able to reach more people to interview, an initiative that English sees as an important improvement to the Beige Book’s overall reliability. Economists now use surveys instead of having conversations with a small number of individuals through random phone interviews, English said, a way to quantify the qualitative information.
Still, the surveying process is not as updated as it could be, said Charles Calomiris, a finance and economics professor at Columbia University who previously served on a Fed advisory council. Machine-learning algorithms, for example, could be utilized to search both social media sites and newspaper articles for economic sentiments, which would save time and prevent Fed economists from having to interview sources at all. The fact that the Fed has not utilized a more updated form of collecting anecdotal information makes him question the Beige Book’s purpose, regardless of its usefulness. The Fed wants to speak with these contacts for a reason, he said.
Calomiris and Blinder said the Fed has kept the report for the purpose of building connections with contacts in the district. The Fed wants these contacts to feel both supported and supportive, Calomiris said, and if Congress ever sought to limit or abolish the Fed’s powers, these contacts would be fundamental to fighting against it.
“It creates cohesiveness, a sense of connection for local business interests who the Fed rely on to help preserve them,” Calomiris said. “Monetary policy is not being made by some quotes of someone out in Albuquerque who says his rattlesnake hunting is not going as well as last week.”
Before the 1990s, board members at Fed Reserve Banks were primarily bankers in the district, Calomiris said. That changed, however, as banks started to merge, leading to business executives replacing some of the bankers. The banking contacts are still important to the Fed and are often included in Beige Book, Calomiris said.
Networking is an important component of putting the Beige Book together, said Art Rolnick, a senior fellow at the University of Minnesota who previously oversaw the Beige Book research process at the Minneapolis Fed. Economists at the bank who worked on the report took it as an opportunity to not only learn about the economic conditions of the region from contacts but to also educate those contacts about the purpose and the values of the Fed, he said.
“Politically, it was a good vehicle to gain support or a better understanding,” Rolnick said. “If something goes wrong, the Fed critics and the conspiracy theorists who don’t understand the Fed blame the Fed and think it has too much control. [The Beige Book] was an attempt to explain that we’re actually part of democracy, [that] our whole objective was to make the economy work better.”
Martin Lavelle, a business economist who prepares the Beige Book for the Chicago Fed, has never encountered any skepticism, let alone anyone connecting the report to a broader political purpose. It’s the Chicago Fed’s mission to serve the community, Lavelle said, which means it’s his responsibility to visit main street and report from the trenches. The relationship building was an important part of that reporting process, he said, but not for the sake of maintaining the Fed’s survival.
“The stronger the relationship we have with the local business community, the earlier we may be able to track a development in the greater economy that could greatly benefit the population at large,” Lavelle said.
Read the next article from this series: “Despite falling under regional banks’ purview, Fed’s Beige Book excludes territories, commonwealths”