The FED is touring the U.S. to meet small business owners and community leaders in “Fed Listens” events


US economy: the Federal Reserve’s reality checkIn October, Jay Powell hosted guests at the Federal Reserve’s Marriner Eccles building in Washington. They sat at the boardroom table where the Fed’s Open Market Committee makes its decisions about interest rates and the Fed’s balance sheet. Silk-walled and chandeliered, the room served as a secure meeting place for UK and US military staff during the second world war.After several hours of conversation, Mr Powell, chair of the Fed’s board of governors since February 2018, said: “We think our inflation is a little bit lower than we’d like it to be. But we realise for many people that sounds a little bit crazy.”He explained to his guests — representatives of non-profits, community groups and small businesses — that if inflation falls too far, the Fed loses its power to encourage banks to lend more. Then, smiling a bit, he asked them: “Do you have any ideas on how to explain that to the public?”The guests broke into laughter. “I think you’re going to need another three hours for that,” said one.This summer, the Fed will release the results of an 18-month review of how it carries out and talks about monetary policy. While President Donald Trump has badgered the central bank to lower rates, the bank itself has been discussing something more fundamental: the tools at its disposal. As part of that review, Fed staff organised 14 “Fed Listens” events, where they invited business and community leaders to their regional Fed bank, at least once, and to the board of governors’ meetings in Washington.Mr Powell came to several of these events, and seemed to enjoy them — asking questions and taking notes.Two messages came through in particular.First, there is more “slack” than the Fed had thought — more people who could still come into the labour force, particularly in poorer areas.Second, most Americans are more worried about increases in the cost of housing and medical care than they are about low overall inflation. Unlike the Fed, in fact, Americans don’t seem to be worried about low inflation at all.The meetings took place at a time the Fed has been rethinking the nature of the post-crisis economy. Evidence from the Fed Listens events has also crept into the standardised language that Mr Powell and his vice-chair, Richard Clarida, use to describe the state of the economy.Trained economists at the Fed have tended to stay cloistered in their own departments, separating the macroeconomics research that guides monetary policy decisions from work on community development. Ms Sahm, who ran consumer and community research at the Fed’s board of governors until October of last year, says the community development research staff had seen early warnings of the financial crisis, but did not know how to package what they had seen for policymakers.“They had absolutely no way to convey that to the FOMC. And [former Fed chair Alan] Greenspan didn’t want to hear anything about it,” she says.“How do you take a thousand anecdotes and turn it into a boardroom briefing?” Ms Sahm says the Fed Listens events, and Mr Powell’s commitment to them, had sent a signal to the career research staff, mostly PhD macroeconomists, about what is important. “Economists don’t trust anecdotes,” she says. “But anecdotes can also spawn an, ‘Oh, I should look at that in the data.’”At the Fed’s December meeting, for example, as part of a presentation on findings from the events, Fed research staff presented results from a model that incorporates “heterogeneity” — the possibility that the same economy has different effects on different people.


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