Fed Family Feud

Is it a mutiny?  A family feud?  Sibling rivalry?  Or an attempt to provide more accurate estimates of economic growth?

Greater accuracy would certainly be a good thing, but that may be the least plausible explanation for the New York Federal Reserve Bank’s launch of Nowcast.

Traders need real-time economic data that they can use to guide trading decisions.  Providing it has been a role that the Atlanta Federal Reserve Bank took on when it created GDPNow in July 2014. Today, GDPNow is widely used by traders—even though, as we’ve previously noted, Fed projections of economic growth are almost always overly optimistic.Fed v. Fed

So why add a second source of inaccurate estimates of GDP growth?  There are several possible explanations:

  • New York is the center of the universe and New York Fed Chair William Dudley found it unacceptable that the Atlanta Fed was grabbing all of the attention with its GDP forecasts.
  • With two different forecasts, the Fed doubles its probability of getting it right (although two times zero is still zero).
  • The Fed wants to show that it does more than just manipulate the stock market and buy bonds.
  • The New York Fed needs to justify its budget and figured it is a good use of taxpayers’ money to produce two separate and distinct GDP growth estimates.
  • The New York Fed wants to prove that it is as capable as the Atlanta Fed of producing inaccurate estimates of GDP growth.

Whatever the reason, the second Fed GDP growth estimate was added “to the puzzlement of some traders,” as The Wall Street Journal put it. 

Read more