Fed Politics: Location, Location, Location

by: Felix Salmon

JP Morgan's Michael Feroli says, in the words of the WSJ's Real Time Economics blog, that all Fed politics is local. Which Federal Reserve banks wanted a cut in the discount rate? The ones where housing prices were looking weak. The Federal Reserve Banks with strong housing markets, on the other hand, didn't want a cut in the discount rate. Here's David Altig's version of Feroli's chart:

feroli_picture.jpg

It's cute. But Altig isn't impressed. He points out that "Federal Reserve Bank districts are a bit larger than the cities in which they are based," and asks:

What do you suppose happens if I take Feroli's chart and replace Atlanta with Miami (the residents of which have exactly the same claim on the attentions of the Atlanta Fed as those who live in Georgia)?

You can click through to his blog entry if you don't know the answer. And Altig has to say that he treats Miami with exactly the same amount of attention as he treats Atlanta: he is director of research at the Federal Reserve Bank of Atlanta, after all.

But I still suspect that Feroli might be on to something. After all, if it was that easy to treat all parts of the country equally, there would be no need to have separate Federal Reserve banks at all: everything could (and probably should) be centralized in Washington. The idea, of course, with the system as it stands is that if you're located in a certain place you'll be more attuned to what's going on there. And clearly, if you're based in Atlanta you're naturally going to be more attuned to what's going on in Atlanta than you will be to what's going on in Miami. You can try to keep everything econometric and objective as much as possible, but as Alan Greenspan has been saying ad nauseam of late, economics often comes from gut feelings, and you get gut feelings not only from looking at numbers but also from overhearing conversations about house prices.