For release: Feb. 13, 2002
Contact: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

Anecdotal Information Useful in Setting Monetary Policy, Says St. Louis Fed's Poole

Link to speech

ST. LOUIS -- Since anecdotal information on the economy is inherently unscientific, the Federal Reserve relies heavily on formal methods when making monetary policy decisions, according to William Poole, president of the Federal Reserve Bank of St. Louis. "Nonetheless," said Poole, "because formal methods provide a far from perfect picture of the economy, the Fed should continue using anecdotal information to fill in the gaps."

Anecdotal information -- drawn from conversations, personal observation, etc. -- helps the Fed improve its understanding of where the economy is and where it might be going, most notably by providing that information ahead of formal data, Poole said. "The process of gathering the information puts us in direct contact with people actually making day-to-day economic decisions. The information forces us to question the formal data and provides a view of the economy that formal methods simply miss," he said. Poole made his comments in a speech to students, faculty and St. Louis business leaders at Washington University's Olin School of Business.

Poole emphasized that the Fed's basic economic picture comes from formal data published by statistical agencies. Key data include categories such as national income accounts, employment statistics, price and wage statistics, industrial production and capacity utilization data, international trade and capital flows, and financial market data on monetary variables, interest rates, security prices and banking markets.

"Formal data have many advantages," Poole said. "We know the statistical methods behind the data and have historical records from which we can study regularities of economic behavior." Poole said he likes to think of informal data as providing insight into the formal data, particularly when it comes to issues such as timeliness.

"As to timeliness, in making monetary policy decisions the Federal Open Market Committee (FOMC) needs to know as much as possible about current and future economic conditions," Poole said. "Unfortunately, the formal data on which we rely lag current economic conditions." He said the Fed has an incomplete picture of the two most important indicators: growth and inflation.

"The Bureau of Economic Analysis release formal estimates of Gross Domestic Product with lags of a month or more," Poole said. "Moreover, the data are subject to frequent and major revisions. Every summer, the final estimates are revised and every three years we get major revisions." Poole noted that official growth and inflation data are not all the Fed has to go on. "Most financial data are very up-to-date, and futures markets allow us to peer into the future -- or at least markets' expectations of the future. In addition, some real economic data, such as unemployment claims, auto and steel production and electricity consumption, are available weekly."

While the Fed relies heavily on data-based methods, said Poole, it also spends a lot of time collecting and using anecdotal information it gathers from an extensive network of contacts. "Because this information is collected from people who are actually making daily business decisions, it helps us to understand why trends in the data are occurring," he said.

Most anecdotal information finds its way into the Fed's "Summary of Commentary on Current Economic Conditions," commonly known as the Beige Book. The Beige Book is published two weeks before every FOMC meeting and is available on the Federal Reserve Board of Governors web site at www.federalreserve.gov. The anecdotal information collected also makes its way into FOMC meetings, where Fed governors and Reserve Bank presidents present their views on the economic outlook. Besides their use in assessing the economy, Poole said, the anecdotes might be used to illustrate a point. "For example, a Bank president could say that 'the market for construction material in my District continues to be tight and prices are rising,'" said Poole.

Poole said the constant process of testing formal data against anecdotal reports, and vice versa, "strengthens our understanding of both types of information. I know I didn't understand the scale and importance of the effort when I came to the Fed about four years ago, and I suspect few observers outside the Fed appreciate the role of anecdotal information in the monetary policy process."

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