Letters To The Editor

International Economy, The, Jan, 2001 by Michael Prell

Fed Quibbles

To the Editor:

I can take a joke as well as the next guy ... but a few quibbles, one per paragraph, regarding your November/December 2000 item on me:

(1) I think you go a little far in characterizing the Board staff's forecasting as "notoriously poor." I'm not sure what the source of this notoriety is. The last five years of staff forecasts have not been made public yet. Even when the forecasts are available, evaluating their accuracy involves considerable conjecture because, unlike most private forecasts, they are often based on arbitrary baseline assumptions about policy--rather than guesses about what the policymakers will actually do. Because of that problem, I've always taken studies purporting to gauge the staff's forecasting performance with a large chunk of salt. But, for what they are worth, I don't believe that the studies reveal a shameful performance, whether measured absolutely or in comparison with other forecasters' results.

(2) I don't know to which "recent speech" you refer, but your account comes up short in terms of accurate reporting. The point I made on a couple of occasions earlier in the fall was that there was an inconsistency between expectations in the stock market (which was higher at the time) and in the fixed income market. It seemed to me likely that if stocks were to perform as anticipated by the market, demand growth and inflationary pressures would be strong enough to forestall the Fed easing then expected. I indicated that I thought that stock market to be overvalued, but hesitated to take a strong stand that the up-trend would not be extended. If the market languished, and especially if it declined, then the expectation of a Fed Funds decline might well be borne out. What has evolved to date obviously looks more like the latter scenario.

(3) I can assure you that I have no intention of providing Chairman Greenspan any personal advice. Judging by how well he has done despite my thirteen years of disservice as Research Director, we can only look forward to the future with the greatest confidence that wonderful things lay ahead for the economy.

MICHAEL PRELL Former Federal Reserve Board Director of Research