Greenspan Reveals Importance of Intuition and Anecdotal Evidence in Fed Decision-Making

Federal Reserve Chairman Alan Greenspan revealed to a congressional panel that the central bank relies on a broad range of models, statistics, and anecdotal evidence from business groups to gauge the economy's strength and forecast inflation. This approach has become necessary due to the changing nature of the US economy, making it impossible to follow any one computer model or economic indicator in setting short-term interest rates. Greenspan criticized the quality of consumer price data, stating that it has been overstated, driving up the cost of federal programs linked to the Consumer Price Index.

Key Takeaways:

• The Federal Reserve relies on a broad range of models, statistics, and anecdotal evidence from business groups to make economic decisions.
• Changes in the US economy have made it impossible to follow any one computer model or economic indicator in setting short-term interest rates.
• Anecdotal evidence from trade groups and advisory councils of prominent business executives is as important to the Fed's decision-making as sophisticated computer models.
• Greenspan criticized the quality of consumer price data, stating that it has been overstated, driving up the cost of federal programs linked to the Consumer Price Index.
• Computer models of the economy have proved unreliable because they assume past economic relationships will stay the same, which is not always the case.
• History teaches that the underlying structure of the economy is in a continuous state of flux, requiring skepticism when making policy for the future.

Statistics:

• No specific statistics are mentioned in the article.

Sources:

• "Greenspan Criticizes State of Economic Data," New York Times, no date provided.