Archive for the ‘Federal Reserve’ Tag

How to frame the Fed’s economic outlook

Sorry for the late post. It’s that time of the month when magazine deadlines overpower more enjoyable pursuits.

The Fed came out with its “beige book” economic reading today. Writers are attributing its results to the market’s 100-point run up this afternoon.

Fed chairman Ben Bernanke

Fed chairman Ben Bernanke

Here’s the sentence that’s supposedly getting investors all excited about a rebound. After noting that the economy has continued to deteriorate, the Fed writes, “However, five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.”

The districts that are seeing a more moderate pace of decline? New York, Chicago, Kansas City, Dallas, and San Francisco. (At least, that’s what I gather from reading the report. I don’t think the Fed spelled out which areas they were referring to specifically.)

It’s good news that some cities aren’t getting exponentially worse anymore, but how would investors react if I rewrote the sentence this way?

“Unfortunately, seven of the twelve Districts noted a steepening or continuation in the pace of decline, and several saw signs that activity in some sectors showed no signs of stabilizing.”

Both sentences are true. But guess what the headlines would have been had my line appeared as the second sentence in the Fed’s report instead of the original line?

As an experiment, I took a look at the June 11, 2003 beige book report. This would have been the tech bubble/September 11 equivalent of the report we’re seeing today. The report noted that four of the 12 districts showed signs of improving, but instead of the sentence of encouragement that we got today, investors got this:

“Although reports from the twelve Federal Reserve Districts indicated some signs of increased economic activity in April and May, conditions remained sluggish in most Districts.”

That day, the S&P 500 closed up a fraction of a percentage point.

Ok, granted, there were 1,000 variables that were different then. For one, investors thought that the weak economic conditions in June 2003 could mean another rate cut was on the way. Of course at the moment, that’s basically impossible.

But could a little bit of framing be going on here? I’m not an expert on the economy by any means, just an interested observer. I wonder how the Fed decides to take a “glass half full” point of view as it did this time versus the glass half empty view it did in 2003. Your thoughts? I’m interested.

– Joe Light

Advertisements