Monetary Witchcraft

The Federal Reserve’s Open Market Committee releases transcrips of its meetings on a five-year delay. They always make for fascinating reading, largely because they lay bear the rudimentary nature of the decision-making process being used by many of the members. Here, for example, is Dallas Federal Reserve President Richard Fischer talking in the newly released December 2006 meeting:

With regard to economic activity, I think there are some continued negatives and some positives. I’d like to pick up on the negatives that I mentioned at the last meeting. The airlines thatI discussed are reporting even more aggressive discounting. One of my contacts, who I think is the longest serving and most successful CEO in the airline industry, said this is the most aggressive discounting that he remembers. Of course, we’ve all seen Wal-Mart’s numbers. There is difficulty in sorting through what is of their own making in terms of their branding and what is the overall slowdown in activity. […]

As far as the positives are concerned, at least at the margin, I’d like to report on a few of them. One is that convenience store operators are reporting a little turn-up in volume and finally seeing the effect of lower gas prices at the pump, and retailers in the past week have noticed a slight pickup from what they were reporting at the end of the November holiday season. With regard to housing, as you know, I speak to two of the five largest builders, and I’ve added a third to that sample. David, they are reporting what they call a sense of a turn, but this may be their perpetual optimism. But cancellation rates have improved from 40 percent to 32 percent according to the reports, and actually in November there was a gross pickup in unit sales of about 3 percent according to these reports. So they are feeling that some pent-up demand is building.

Like at the end of Apocalypse Now, it’s not so much that President Fisher’s methods are unsound as that I don’t see any method here at all. He talks to the CEO of an airline, presumably American or Southwest because they’re based in the Dallas area, and they say there’s aggressive discounting. But for some reason he won’t tell his colleagues which airline and he doesn’t seem to have asked his anonymous source whether this is a supply-side or a demand-side phenomenon. More generally, he sorts his anecdata into “negatives” and “positives” for the economy, not into positive and negative demand shocks so there’s no way to understand what the implications for monetary policy are supposed to be. He talks to homebuilders, notes specifically that their testimony is unreliable, and then enters their admittedly unreliable testimony as evidence. But why?