Four Things We Learned From the New York Fed’s 2010 Blackbooksby
U.S. central bankers faced a plethora of challenges in 2010, when they struggled to revive an economy still battered by the global financial meltdown while fighting off headwinds of the European debt crisis. Through a Freedom of Information Act request, Bloomberg has obtained documents that provide a rare, behind-the-scenes look at some of the private forecasts and deliberations of Federal Reserve staff members at the center of the storm.
Here are four key takeaways from the briefing books prepared at the time by New York Fed President William Dudley’s staff members. Known as the Blackbooks, the previously unpublished reports were written ahead of the Federal Open Market Committee interest-rate decisions that year.
1: Staff members were consistently less pessimistic about inflation than their counterparts in Washington, whose briefings are known internally as the Greenbooks. The New Yorkers also expected monetary policy to tighten at a faster pace.
In the January Blackbook, New York Fed staff wrote: “The Greenbook projects the Federal Funds Rate (FFR) to remain in the current target range of 0–0.25% until 2011Q4 while the Blackbook central forecast assumes that the FFR will reach 1.50% by the end of 2011.”
Moreover: “As in December, we disagree with the Board Staff on the core PCE projections for 2011: the Greenbook projects core PCE to continue falling to 1.1% in 2011, while we see it increasing to 1.5%. This difference reflects different assumptions about the impact of the output gap on inflation and the intrinsic persistence of the inflation process.”
By the end of the year, New York was still projecting relatively higher inflation, and expected higher interest rates to arrive sooner than their colleagues in Washington.
2: Throughout the first half of 2010, staffers estimated the economy was still about a year away from being able to recover on its own steam.
In the January Blackbook, New York Fed staff wrote: “In light of our outlook, we recommend maintaining the current accommodative stance of monetary policy until the economy appears to be on a self-sustained path to recovery, which in our central scenario does not occur until the end of 2010.”
In March: “In light of our outlook and risk assessment, we recommend maintaining the current accommodative stance of monetary policy until the economy appears to be on a self-sustained path to recovery, which in our central scenario does not occur until the end of the first quarter of 2011.”
And in June: “In light of our outlook and risk assessment, we recommend maintaining the current accommodative stance of monetary policy until there is more confidence that the economy is on a self-sustained and balanced recovery path. Because of the greater downside risks discussed above, in particular the deterioration of financial conditions, we now advise that the fed funds rate be maintained at its effective zero bound until the end of 2011Q2.”
By August, as the outlook continued to deteriorate, staffers had stopped referring to a self-sustaining economic recovery.
3: In mid-2010, New York Fed staff were arguing that the central bank should target a price level instead of just an inflation rate. The FOMC never adopted the proposal, though some participants still voice their support for that approach.
In the June Blackbook, New York Fed economist Argia Sbordone suggested the FOMC could modify its post-meeting statement to “state that policy accommodation will be maintained until ‘average inflation’, defined over a two-to-three year window, is not lower than the central tendency of the long-term FOMC inflation projection.”
In the September Blackbook, then-New York Fed economist Gauti Eggertsson went further.
“We suggest that the FOMC keeps track of the extent to which it has ‘missed’ its inflation target,” Eggertsson wrote. “Let us call these accumulated misses ‘inflation debt’. Hence if the inflation target is 2 percent, and inflation is at 1 percent for two years in a row, then the accumulated ‘inflation debt’ is 2 percent.”
4: New York Fed staff considered a number of scenarios and risks in presenting options for policy, of which they considered a “Productivity Boom” the most likely to occur.
In the January Blackbook, New York Fed staff ranked the following scenarios for how the economy would evolve over the coming year, in order of likelihood: “Productivity Boom,” followed by “Effects of Overheating,” and then “Global Credit Crunch” and “Loss of Credibility.”
By December, scenarios for the following year were ranked: “Productivity Boom,” followed by “Fiscal Consolidation,” then “Global Deflation,” and finally “Loss of Credibility.”
Staff analyzed the different scenarios in light of different policy rules. Those included a “Baseline” rule, an “Asymmetric Price Targeting” rule (which amounted to instituting a price-level targeting regime, but only when inflation was below target), and a “Nutter” rule, which only responded to changes in inflation and ignored changes in output.