Fed Chief Greenspan Says Advanced Technology Complicates Economic Forecasts

Federal Reserve Chairman Alan Greenspan testified before a House subcommittee on monetary affairs, stating that advanced technology has made it harder for the central bank to measure the economy and set interest rate policy. Greenspan acknowledged the challenges involved in forecasting the economy's path and gauging its strength, which is further complicated by the increasing conceptual nature of goods and services. Despite these difficulties, Greenspan assured policymakers that imprecision in published data on the macroeconomy does not pose a crippling hardship, and that the Fed is able to implement policy to meet national economic objectives despite potential errors in forecasts.

Key Takeaways:

• The Federal Reserve faces challenges in measuring the economy due to advanced technology and the increasing conceptual nature of goods and services.
• Greenspan testified that the list of shortcomings in U.S. economic data is "depressingly long" and that the computer age has complicated measuring the economy.
• The Fed uses a range of economic forecasts and judges the relative probability of each when setting monetary policy.
• Policymakers consider not only traditional economic indicators but also information on firm behavior and signals from financial and commodity markets.
• The Fed aims to meet national economic objectives despite potential errors in forecasts, and assesses the consequences of various policy alternatives.
• The central bank's interest-rate decisions have worldwide impact and are subject to repeated criticism from Congress and other sources.
• Greenspan emphasized that the Fed looks at various sources to consult and minimize the adverse effects of mismeasurement.
• The Fed's ability to consult a variety of sources allows them to keep the adverse effects of mismeasurement to a minimum.

Statistics:

• Five years have passed since the Fed last raised interest rates (Feb. 4).
• The Fed has made four other increases in short-term rates this year.
• The nation's top banker testified that a computer program is not well-defined with regards to quantity and quality.

Sources:

• Alan Greenspan testimony before a House subcommittee on monetary affairs
• Bureau of Labor Statistics reports on producer and consumer prices (July data)
• Federal Reserve records of interest-rate decisions and economic data