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How—and why—does the Federal Reserve chairman decide to raise interest rates? By analyzing statistical indicators and raw data on the health of the U.S. economy. By pulling together reports of the Fed, governors and bank presidents. Then, by tossing in anecdotal insights—real-time information—from hubs of U.S. manufacturing, distribution, retailing and financial activity. Add 25 years of experience, and you get a knowledge management system that corporate leaders covet.
The Nations Economic Health was glowing. Unemployment held steady at 5.4%. Gross domestic product growth was up 4.4% and inflation remained in check at 3%, compared to a year earlier.
Still, Alan Greenspans brow creased with concern.
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As 2005 began, he was getting sometimes conflicting reports from the other six governors of the Federal Reserve Board and the presidents of the 12 Federal Reserve Banks across the country.
Snarls had ended at the Los Angeles and Long Beach ports, where, prior to Christmas, huge container ships sat backed up in the harbors for as many as 6 1/2 days, reported Janet Yellen, president of the Federal Reserve Bank in San Francisco. Shipments of everything from toys to big-screen TVs from China were now moving smoothly out of the ports to retailers across the country.
Four hurricanes had whipped Florida in the fall. That took bites out of consumer spending as homeowners paid more for insurance deductibles and tourists stayed away. However, job growth looked strong in the region overseen by Jack Guynn, president of the reserve bank in Atlanta. Unemployment had dipped to 4.5% in December, from 4.9% a year earlier.
The Midwest was a mixed bag. Automobile production had surged 2.3% in December, capping a year that saw auto production accelerate 3.2%. But steel prices, which had doubled to about $630 a ton for hot-rolled sheets, were now hurting manufacturers in the smokestack region overseen by Michael Moskow, president of the reserve bank in Chicago.
Fed chairman Greenspan had to make sense of these tales and the data behind them at the Feb. 1 meeting of the Federal Open Market Committee. He leads that Federal Reserve body, which guides U.S. interest rates and monetary policy.
He would mentally compare the governors and presidents assessments and anecdotal reports against the reams of economic data analyzed for him and the other board members by the Feds 225 economists and those at the 12 Federal Reserve Districts. Some of the countrys brightest minds have tilled data at the Fed for more than two decades, including research-division director David Stockton and banking-research chief Thomas Brady.
In the weeks before the Feb. 1 meeting, Fed financial experts pored over every available economic statistic, big and small, from corporate profits to industrial production to the Producer Price Index, which measures the change in prices manufacturers receive for the products they make.
What would Greenspan do? Inside his brain would be calculated the most likely impacts of all the colliding data. Once again, as it had been for more than 17 years, it would be his job to make choices that would keep the economy growing. If he raised interest rates more than the quarter percentage point the market was expecting, businesses might rethink their expansion plans for the year, eliminating thousands of jobs. If he didnt raise rates, inflation could take flight as consumers and businesses took advantage of the low cost of borrowing money.
On yellow legal pads, the same ones he uses to jot down thoughts when he takes his morning bath, the chairman had added up the inputs and determined that the economy was on a roll. But to stave off inflation, it was time to increase the Federal Funds Rate—an overnight bank lending rate that influences rates on mortgages, car loans and many other loans—another .25%, to 2.5%. It would be the sixth quarter-point increase since June 2004.
Greenspan figured his measured move would keep inflation in check at an acceptable 3.4% over the next year. It would also give the Fed some breathing room. If signs of a slowdown emerged, he could lower rates to stimulate the economy.
“All told,” he testified before Congress two weeks later, “the economy seems to have entered 2005 expanding at a reasonable pace, with inflation and inflation expectations well anchored.” The normally opaque Greenspan even smiled that day.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEGreenspans Secret
: Get the Best Data, Stew Slowly”> 
Greenspans Secret: Get the Best Data, Stew Slowly
This is the kind of hard number-crunching and anecdotal analysis that pulsates inside the mind of Alan Greenspan. His singular approach to analysis leads him to economic decisions that affect the flow of billions of dollars between banks and countries, dampen or bolster the profits companies report to shareholders and, in turn, create or destroy millions of jobs.
Chief executives covet Greenspans information system—a mixture of raw data and computerized intelligence systems, combined with personalized tales from the key hubs of economic activity.
Such a comprehensive and malleable model of the economy and what it means could, in theory, allow any company to finely tune how it deals with its customers, by creating more or fewer goods and services to provide them; its suppliers, by choking down or opening up orders for more materials; and its stockholders, by more accurately forecasting performance and reducing surprises on the bottom line that could damage the price of its shares.
Fewer than 10% of U.S. corporations have created systems to gather, analyze and act on economic data in anything close to real time, according to David Simchi-Levi, a professor at the Massachusetts Institute of Technology who specializes in supply chains.
One of the few companies thats close is Wal-Mart, says Simchi-Levi. The retailers near-instant reporting system helped save its Christmas.
On Black Friday, the critical shopping day after Thanksgiving that retailers use to confirm that their bottom line for the year will indeed be black, Wal-Mart was worried.
Hourly sales figures from its 3,618 U.S. stores were being beamed to the BlackBerry communication devices of the chains top executives, including U.S. stores president Michael Duke. No one liked what they saw—virtually no increase in sales from Black Friday the year before.
By 2 p.m. that day, Duke, who was in the field at an Atlanta Wal-Mart, issued orders to mark down prices on key items, such as toys and electronics. Regional managers and other senior executives were called into the companys Bentonville, Ark., headquarters for an emergency strategy session. On Saturday, a meeting was held with 500 front-line employees in the companys auditorium to ask for their suggestions. One that was accepted, says Wal-Mart spokeswoman Mona Williams, was a recommendation to have Wal-Mart employees shop at competitors stores and report back to managers on what seemed to be moving and at what price.
By the following Friday, a national advertising campaign promoting hundreds of marked-down items was launched. The result: a 3% gain in sales over the Christmas period instead of an apology to shareholders.
Like Greenspan and the Fed, Wal-Mart relies on electronic data feeds, software-driven analysis and the findings of eyes, ears and feet on the ground.
Wal-Mart may be the U.S. economys largest single corporate entity. But it is just one company. The stakes for the Fed, specifically for Greenspan, are much larger: Since the U.S. dollar is no longer tied to the price of gold (that ended in 1971), the only thing that gives the dollar value is the confidence other countries have in the U.S and the Federal Reserve chairman who regulates its monetary policy.
Greenspan is the Feds gold standard, now. But not for long.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEHow Do You Get
To Be a Guru?”>
How Do You Get To Be a Guru?
On Jan. 31, 2006, Greenspan, 79, plans to retire. That day will mark the end of his 14-year term as a Fed governor and the midpoint of his fifth four-year term as chairman. Soon after President Reagan nominated him in August 1987, the stock market suffered a 508-point drop in a single day. It was the worst one-day fall since the crash that led to the Great Depression in 1929.
Fed watchers say Greenspans savvy engineering of interest rates and the money supply limited the damage caused by the crisis. He went on to preside over the longest modern-day surge in the U.S. economy, which lasted most of the 1990s.
But some critics complain that Greenspan failed to prevent the “irrational exuberance,” in his famous words, that led to the dot-com bubble and its collapse in March 2000.
With the GDP barreling ahead at 4% in the first quarter of 2005, and Greenspan raising the Funds Rate by just another .25% on March 22, some Fed watchers are questioning whether Greenspan is once again letting the economy grow too fast. And last month, Senate Minority Leader Harry Reid (D-Nev.) called Greenspan “one of the biggest political hacks” for backing President Bushs recent economic initiatives such as the privatization of Social Security.
The next Fed chairman, nonetheless, will be judged against Greenspans insights and instincts. Though the successor wont share Greenspans brain, he or she will have the same intelligence system: a network of some 500 economists at the Fed and its 12 reserve districts who will continue to analyze more than 1.5 million points of economic data via Sun Microsystems Solaris and Red Hat Linux servers.
Its a hard-to-replicate knowledge management system involving both humans and computers. Corporate leaders can only dream of having such an asset at their disposal.
Congress created the Federal Reserve in 1913 as a fail-safe bank to the banks. Its job was to accept other banks deposits, make overnight loans to them and issue coin and currency. Today, it also processes 18 billion inter-bank checks each year.
Its most public role—Greenspans role—is to set monetary policy.
The chairman regulates the supply and price of money to achieve three primary goals: maximize economic growth, advance employment and control inflation.
To achieve those objectives, he has a powerful set of tools. For starters, he can raise or lower interest rates, by ripple effect, throughout the country by adjusting either the Federal Funds Rate or the Discount Rate.
The Federal Funds Rate is the price commercial banks charge each other to borrow federal money overnight. The Discount Rate is the price the 12 reserve banks charge commercial banks to borrow funds on a daily basis.
By directive, Greenspan also can increase or decrease the amount of money banks lend by raising or lowering the amount of money they are required to hold in reserve against outstanding loans and investments, something known as the “reserve requirement.” In effect, if a bank is required to hold $20 of each $100 it receives in a deposit, it can lend 80% of its deposits. If it must hold only $10, it can lend $90, which increases the amount of money in use.
Separately, Greenspan can manipulate the supply of money in the economy by selling or buying government securities such as Treasury bills.
Greenspan decides which tools to wield from an elaborate two-story boardroom in the center of the Federal Reserve building on Washingtons Constitution Avenue.
On meeting mornings, like Feb. 1, Greenspan enters this room from his attached office and seats himself at the side of the 27-foot mahogany table. He prefers to be seen as participating in the discussion rather than leading it.
Still, attendees know who is in charge.
Greenspan arrives at these meetings with his mind largely made up, according to Laurence Meyer, vice chairman of private forecasting firm Macroeconomic Advisers and a Fed governor from 1996 to 2002.
The chairman knows what he wants to do, such as raise the Funds Rate, and has already drafted the statement the Fed will issue after the meeting.
Greenspan is guided by the advice of six governors, named to 14-year terms by the presiding U.S. president. The governors and the 12 reserve bank presidents each get an opportunity to speak, usually for about five minutes. But unless the majority strongly disagrees with the chairmans views, Greenspans plan will be approved.
Meyer says Fed board members do debate. But the assumption is that everyone will vote with Greenspan at the end of the meeting. Perceived dissension at the Fed could shake confidence and set off financial-market chaos, he explains. A split vote would cause uncertainty in the markets about exactly where the Fed was headed—to higher or lower rates.
“The committee doesnt want to fracture consensus,” he says. “You never like to surprise markets.”
Indeed, the Fed chairman does not give interviews, fearing his words could affect stock markets worldwide.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEFinding the Right Questions
to Ask”>
Finding the Right Questions to Ask
Greenspan has spent years in and out of government searching for ways to eliminate economic surprises.
He previously served as economic adviser to Presidents Nixon and Ford, but had made his mark in the business world by providing economic forecasts to paying corporate clients, like Republic Steel (since merged into LTV Steel).
At the firm of Townsend-Greenspan, the tenor-saxophone-playing New York University Ph.D. economist had become particularly adept at forecasting demand and prices for steel and raw materials, like iron ore and coke, involved in its production. He accurately forecast a glut of steel production in 1957, by comparing steelmaking capacity against consumption patterns. His advice allowed clients to escape some of the turmoil that hit the industry in 1958, when steelmakers were forced to curb production 20%.
Previous Fed chairmen, such as Greenspans predecessor, Paul Volcker, had been primarily interested in aggregated metrics like the Consumer Price Index. That is a monthly measure of the change in prices urban shoppers pay for a fixed set of goods and services, including department store products and apartment rents.
But Greenspan thinks differently. When he arrived, economists started getting more requests from the chairmans office for disaggregated data—individual points of information like the price of hot-rolled steel, construction-grade plywood or circuit boards.
Greenspan wants such data points to seek out telling shifts in the U.S. economy that large aggregated figures like the GDP sometimes disguise. A significant drop in demand for steel, for example, might not be noticed because it could be masked by increases in demand for non-steel-based products like furniture, clothing and shoes. But a dip in steel consumption may indicate that manufacturers of cars, dishwashers, microwaves and freezers are girding for a drop in demand for their products.
Wal-Mart does something similar, drilling down to compare, for example, sales of lightweight spin-casting fishing rods to determine subtle shifts in consumer tastes, perhaps brought on by a Hollywood movie such as A River Runs Through It, about fly-fishing in Montana. That might be invisible looking only at total sales of fishing rods.
For Greenspan, the summer of 1996 was spent studying U.S. productivity data. He was perplexed by figures showing a steady drop in productivity, or the output per hour of a worker.
The data didnt make sense next to his anecdotal evidence. His staffs ground reports and his own industry contacts indicated that new technology was helping companies dramatically boost productivity.
Greenspan had the Feds economists conduct a massive research project, calculating the change in productivity in every major sector, from manufacturing to mining, finance, agriculture, education, health care and services. They found a number of flaws in how productivity was measured, particularly in service businesses such as insurance, law and banking, where technology had made a tremendous impact.
Automated teller machines, for example, let banks serve more customers faster. But because the main service they offered—money withdrawals—was largely provided for free, the benefits were not being recognized. The traditional productivity stat measures the amount of output in dollars that comes from an hour of labor. Because there was no output or income generated by these machines, there was no recognition of the increase in productivity banks achieved.
The research led Greenspan to conclude that productivity gains in the service industries were at least as high as, and probably higher than, the 3.6% average annual gains recorded in the manufacturing sector between 1994 and 1997, even though the data did not show it. That compared to average gains of 1% to 1.5% in the previous two decades.
As a result, Greenspan decided not to raise interest rates, even though many of his colleagues pressed for increases. Based on history, they feared, inflation would jump if interest rates did not slow down the economy. Instead, Greenspan theorized that gains in productivity would prevent prices from rising—an informed hunch that the data would later prove correct.
“I was on the opposite side of the chairman in that debate,” Meyer says. “But he was right. He deserves the credit for figuring it out.”
Greenspan goes through a similar process of checking incoming data against insights gathered from the field before each Federal Open Market Committee meeting.
In the weeks leading up to the Feb. 1 gathering, economists with the San Francisco Federal Reserve Bank placed a number of calls to executives with the Long Beach and Los Angeles ports and at local shipping companies.
The ports, which combined are the nations busiest, had been plagued by delays in the months leading up to Christmas. The concern for Greenspan was whether those delays would have trickle-down effects. Manufacturers might be waiting on parts and retailers might not be able to restock shelves, which might in turn mean consumers would hold off opening their wallets until those big-screen TVs arrived in stores.
The ports went through their own version of the perfect storm: A surge of new production from China of everything from toys to consumer electronics, and parts for larger products like computers, had the ports working at full capacity in the summer months. Then, heading into the fall, a sharp increase of imports from retailers like Wal-Mart and Target, whose fine-tuned supply chains have stores receiving merchandise just in time to be placed on shelves for Christmas, pushed the infrastructure and workforce past their limits.
Normally a ship arrives at a scheduled time, pulls into an open dock and is unloaded in three to four days. In late October, ships were often waiting more than six days to dock, then taking more than 10 days to unload because of a shortage of longshoremen, cranes and trains.
At its worst, as many as 86 ships were lined up offshore to be unloaded at the two ports. The result was a seaside traffic jam. “It was unbelievable,” says David Arian, president of Local 13 of the International Longshore and Warehouse Union. “There was an armada of ships out in the harbor waiting to be unloaded.”
Not only were the ports overwhelmed, the rail lines couldnt move containers from the ships fast enough. Union Pacific was left understaffed when an unexpectedly large number of employees accepted an early retirement plan.
Months might pass before the effects of this type of logjam would show up in national statistics like the GDP, retail sales or inventory figures. But near-real-time anecdotal reports from economists with the San Francisco reserve bank kept Greenspan informed.
“What we look for is major developments in our regions that may have national implications,” says Fred Furlong, vice president of financial and regional research for the San Francisco Fed, whose region encompasses California, Arizona, Nevada, Utah, Oregon, Washington, Idaho, Hawaii and Alaska.
“Our position [as an arm of Greenspan] provides us with access to a large number of people on the ground with first-hand access to whats going on with the economy,” he adds.
Prior to each open market committee meeting, San Francisco economists make close to 100 calls to key contacts, such as chief executives, finance officers and controllers with major employers in the region, such as Boeing, Intel, Union Pacific and the ports. Other reserve banks do the same.
Similarly, Wal-Marts employee-led program to collect eyewitness intelligence on rivals sales helped clinch its decision to slash prices before Christmas.
What Furlongs team found right before the February meeting was that the worst was over. Two thousand full-time and 7,000 part-time longshoremen had signed on to help the existing 5,000. Union Pacific had hired 4,000 workers, eliminating most of its staffing bottlenecks.
The message San Francisco Fed president Yellen delivered to Greenspan was that port delays were no longer an immediate threat to the economy.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEGood Data
+ Good Technology = Good Analysis”>
Good Data + Good Technology = Good Analysis
But, of course, Greenspan doesnt make decisions on anecdotal information alone. Inside the marble Fed building, 225 Ph.D. economists are dedicated to the single-minded task of understanding the U.S. economy and its relation to world economies.
The Feds research division captures and monitors information from hundreds of corporate, government and university sources. Housing starts. Jobs created. Gas prices. Measurements of mood, such as the University of Michigan Consumer Sentiment Survey, which examines consumers confidence in the economy and their likelihood to spend money on cars, TVs and clothes.
The Fed also buys mortgage and credit card information from banks and lenders to study how and how much consumer spending is being financed.
All the data must be consolidated, analyzed and delivered to Greenspan and the other members of the board. They meet formally eight times a year, but receive reports daily.
Sandra Cannon, Greenspans chief of economic information management, makes sure reports on the GDP, consumer prices and other economic indicators are gathered as soon as theyre available and loaded into the Feds Forecasting, Analysis and Modeling Environment (FAME) database system.
A number of top-tier banks, investment houses and energy trading firms such as Credit Suisse First Boston and Morgan Stanley use FAME for financial analysis. Disaster recovery specialist SunGard Data Systems acquired the system in 2003 from FAME Information Services.
Once numbers are uploaded to FAME, economists at the Fed begin their calculations.
Unlike a typical database, which stores data in categories such as date in one column and price in another, the system builds time into each piece of information. It can store, for example, that the rate on a five-year variable mortgage was 5% on Feb. 1, 2005, and 5.25% on Feb. 2, after Greenspans tweak.
The payoff for financial organizations, says SunGard FAME product specialist Kenneth Kunin, is that time-based calculations can be done faster and with less programming. Time is already attached to the information, making it easier to figure out, for example, how much interest might be earned on a banks deposits from September 12 to March 16.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEDelivering the Good News,
and the Bad”>
Delivering the Good News, and the Bad
Most official government data comes out at 8:30 a.m. or 10 a.m. on a given day. GDP numbers, for example, are issued at the end of each month from the Commerce Departments Bureau of Economic Analysis at 8:30 a.m. Eastern time.
By 8:35 a.m., Cannons office has downloaded the figures from the bureaus Web site. By 8:45 a.m.—9 a.m. at the latest—they are uploaded into FAME. Cannons office then sends an e-mail to let staff know new figures are available.
Fed economists anticipate mornings when marquee numbers come out—such as the GDP or the Consumer Price Index—like baseball fans waiting for the latest box scores.
“Theyre ready and waiting and wanting to know if theres the least little problem [with their economic forecasts], and theyre more than happy to volunteer their assistance to type in numbers if they have to,” Cannon laughs.
These days the Fed receives most data electronically, through downloads from Web sites or e-mail. Thats a major change from when Cannon joined the Fed seven years ago. Back then, people, not machines, gathered data, she says.
“We used to send a staff member and a driver to the various agencies to pick up a package that would have some form of media on it—a disk or tape—and then wait for them to drive all the way across town before we could start inputting and processing things,” she recalls. Some reports, such as the Advance Monthly Sales for Retail and Food Services, came on paper and would be typed into the database.
This download-upload process of populating FAME is repeated 50 to 60 times per month, whenever new data comes out. When Cannons seven staffers arent shunting information around, they produce tables and charts with the latest figures to distribute across the agency, to the Feds economists, reserve districts, governors and, of course, to Greenspan.
The chairman likes to get a copy of the actual data and the charts. “Basically, all the data that comes through my office winds up on his desk in one form or another,” Cannon says.
Greenspan studies each report, looking for warning signals of inflation or the beginnings of an economic shift. By Feb. 1, for example, Greenspan had been expecting the strong economy, humming along in the latter half of 2004 with gross domestic product growth of 4%, to be creating significant numbers of new jobs. But it hadnt.
Job growth remained in the range of 125,000 new jobs per month in November, December and January, barely half what was expected. He uses the detailed reports to look for clues, such as which industries appear to be lagging in job growth, and asks for more number-crunching to find the answers.
Economic forecasting, though, is both science and art, says David Reifschneider, deputy associate director for the division of research and statistics at the Fed headquarters. The science is the sophisticated computer modeling that examines the data, compares it against past performance and predicts the future.
The art comes from personal insights, knowledge and intuition to deal with the shortcomings of science. Economic statistics can be wrong due to incomplete data or off-kilter sampling that only becomes evident down the road. A GDP number that comes out one month is usually revised the next month and again a month later, as more information comes in, is vetted and refined.
Greenspan has a discriminating feel for how statistics might be off, and weighs that sense against the other data and anecdotes presented to him. Often, he pursues a theory with a question. How could productivity be falling in the service sector, he asked in 1996, when the stories he gathered said that businesses were more productive than ever?
“Theres a degree of forensic science to economics,” says Reifschneider, who has been with the Fed for 20 years. “When something unexpected happens, it causes you to pause and say, What was that all about? What were the forces that combined to make that happen?”
Fed economists have their own pet tools for deciphering and modeling the data stored in FAME, such as SAS/Insight from SAS Institute, based in Cary, N.C., and Regression Analysis of Time Series (RATS) from Estima, an economics software firm in Evanston, Ill. Regression analysis is a statistical technique to find correlations between several variables. You can determine, for example, whether and how much a 3- or 8-cent rise in gas prices affected consumer spending during a period when housing prices fell 20%.
However, three homegrown modeling applications do the heavy lifting of understanding the forces at work in the economy: Federal Reserve Board (FRB)/US, FRB/Global and FRB/Multi-Country (for the Group of Seven industrialized nations). Each model pulls on information from FAME and incorporates hundreds of equations to calculate how one factor affects hundreds of others.
Different variables are weighted to perform what-if analyses. How would a $57 barrel of oil impact inflation vs. a $52 barrel? Or, what would a drop in car prices do to consumer savings rates? The Fed would calculate, for example, the combined effect on the GDP of a .5% drop in productivity, a 1% increase in unemployment, a 4% increase in personal consumption expenditures (a measurement of how much of a persons income is spent meeting everyday needs), and a 2% increase in the Producer Price Index. Dozens of other factors might get tossed in.
Today, 70 Sun Solaris servers process that data. But by this summer, the Fed will have replaced the Sun machines with 85 less expensive Intel-based servers running Red Hats Linux operating system. Mike Cringoli, research computing chief, says the Fed was due to upgrade its servers, and smaller servers will allow each section to manage its own computing resources.
The results of the data analysis go into three color-coded books distributed to Greenspan, Fed governors and reserve bank presidents before their meetings.
The Beige Book provides a picture of current economic conditions based on the latest available data and anecdotes collected from the field.
The Green Book predicts how the U.S. economy will perform in the next year, including gross domestic product forecasts and the inflation outlook. Economists run the latest available information in FAME through FRB/US, then adjust the forecasts to reflect their own tacit knowledge.
The Blue Book recommends monetary policy actions. If unemployment is high, the economists will run scenarios using various assumptions, such as lower interest rates and buying back Treasury bills to put more money into the economy.
What Greenspan gets in those books is the combined analysis of almost 500 economists at the Fed and the reserve districts, who spent weeks crunching numbers. It is the collective wisdom of some of the best economic thinkers in the nation.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEWhat Do You Do
When The Gurus Gone?”>
What Do You Do When The Gurus Gone?
When Greenspan retires next year, the mind of the next chairman will be judged against the synapses of his predecessor.
John Lipsky, vice chairman of JP Morgans investment bank, says Greenspan will be hard to follow. “During his tenure, the U.S. economy returned to 40-year lows in inflation and the longest sustained expansion in modern history,” Lipsky says. “The Federal Reserves credibility is at an all-time peak.”
The rumor mill has several current governors as front-runners, notably Ben Bernanke and Donald Kohn. Outsiders mentioned include Undersecretary of the Treasury for International Affairs John Taylor, Harvard professor Martin Feldstein, and former head of the Council of Economic Advisers Glenn Hubbard.
No matter who replaces Greenspan, only so much knowledge can be transferred through books of different color or conversation with the former chairman.
But while the new chairman wont have Greenspans own expertise, instincts or intuition, he will be surrounded by the same governors, reserve bank presidents and career economists who aided Greenspans every move. The analysis software also will still be there, providing the newcomer with the means to analyze Greenspans past actions and their results.
“Losing talented people is something every organization has to deal with,” says San Francisco Fed research chief Furlong. “But there is a large degree of continuity, an ongoing sharing and dissemination of data that takes place here.”
Incoming chief executive officers at Walt Disney, Boeing, British Airways, Sony and insurer AIG generally only hope to encounter such continuity and such resources at their fingertips in their new jobs.
Story Guide:
- Why Does Greenspan Look Unhappy?
- Greenspans Secret: Get the Best Data, Stew Slowly
- How Do You Get To Be a Guru?
- Finding the Right Questions to Ask
- Good Data + Good Technology = Good Analysis
- Delivering the Good News, and the Bad
- What Do You Do When The Gurus Gone?
- Federal Reserve: Stats and Specs
ZIFFPAGE TITLEFederal Reserve
: Stats and Specs”>
Federal Reserve: Stats and Specs
Headquarters: 20th St. and Constitution Ave. N.W., Washington, DC 20551
Phone: (202) 452-3000
Business: U.S. monetary policy, economic research
Chief Information Officer: Stephen Malphrus
Budget 2004-2005: $529 million.
Challenge: To collect and analyze more than 1.5 million economic statistics to help devise monetary policy and affect performance of the U.S. economy.
Baseline Goals
- Keep inflation, as measured by personal consumption expenditures, at 1.75% or less in 2005 and 2006, about the same as last years 1.6% increase.
- Grow the economy by 3.5% or more, compared to 3.75% in 2004.
- Reduce unemployment to 5.25% or less, from 5.4% in 2004.
- Work with the White House to reduce the federal deficit, from $412 billion last year.