Federal Reserve Reservations
It’s all good.
Eric Rosengren, President, FRB Boston. Source: FRB Boston
That’s what Eric Rosengren, President of the Federal Reserve Bank of Boston assured about 150 business leaders from the Concord area last week. Rosengren has spent his entire career and the Boston Fed. He got a BA from Colby College and a Ph.D. from the University of Wisconsin – Madison in economics. He joined the Fed as an economist right out of graduate school, and ran the research department as well as the bank examiner’s office.
Rosengren has spent his professional life working with macro-economic data. He knows his way around labor force participation rates and potential GDP growth. Rosengren is a smart man. So when he says that the financial markets are too pessimistic in their view of the US economy, we need to pay attention. After all, the data show our economy is growing steadily, if slowly. A growing economy should see interest rates move back towards normal.
But there are feedback loops in the economy that aren’t immediately apparent in the data. With the US economy growth faster than its trading partners, the dollar is strengthening. Any move by the Fed to raise rates only pushes the dollar higher. Currency vigilantes seem to have replaced bond vigilantes in the present environment. A higher dollar does several things: it crimps US exports; it reduces tourism here—along with tourist purchases at retail outlets; it raises the price of oil everywhere else in the world; it makes it more difficult for emerging economies to service their dollar-based debt. The dollar acts as a force-multiplier for interest rate policy.
Trade-weighted US Dollar. Source: Bloomberg
When President Rosengren was asked what he thought his personal data-biases might be and how he corrects for them, he assured the audience that he was data-dependent—that working with objective, quantitative indicators will counter his natural dovish tendencies. He noted that he had dissented twice in policy votes—both times voting for lower rates. It’s all good, he assured us. The data will set us free.
But data are never objective. They have their own inherent biases. We know cell phones and caller ID have made political polling problematic. Why should economic surveys be any different? We know that there is a status-quo bias in all measurements—that they tend to miss new developments. And—with all due respect—President Rosengren has never had to meet a payroll. It seems that he is underestimating the disruptive effects of the financial crisis and ensuing recession. Businesses that saw their credit lines revoked—and had to lay off thousands of workers as a result—won’t have “normal” animal spirits. It will take a while for them to borrow and grow as if the rest of the world has gone “back to normal.”
A lifetime spent calculating equilibrium interest rates and managing research departments might make you a good analyst, but may not help you see how the economy is changing—how the data themselves distort our view of what’s going on. For that, you need real-world experience. When you stare too long at any set of numbers, sometimes all you get are spots in front of your eyes.
Douglas R. Tengdin, CFA
Chief Investment Officer