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The Role of Federal Reserve Surveys

June 2013

Nicholas Parker: Hello, and welcome to another EconSouth Now podcast. I'm Nicholas Parker, senior economic research analyst in the Atlanta Fed's research department, and I'm talking to Mike Bryan, vice president and senior economist in the Atlanta Fed's research department. We are going to discuss Federal Reserve surveys and how information gathered through these surveys informs monetary policy making. Mike, thanks for joining us today.

Photo of Mike BryanMichael Bryan: Thanks Nick, pleasure to be here.

Parker: So, Mike, I recently wrote an article outlining some of the reasons why district Fed banks, as well as the Board of Governors, create and administer their own surveys. The thesis of this article is that monetary policy decisions are only as good as the quality of the data they are based on, the quality of data being determined fundamentally by two main criteria: the data's depth and timeliness. In other words, does the data answer all, or at least most of your questions, or does it even exist? And is it collected and presented at a time when it is most useful?

I thought we could talk about these criteria and Fed surveys in the context of our favorite survey: the Atlanta Fed's Business Inflation Expectation survey; we'll call it the BIE. Full disclosure: Mike is the creator of the BIE survey.

Maybe we can start with the informational need the BIE survey satisfied. In other words, what motivated you to create it?

Bryan: One of the Fed's two mandates is to set monetary policy so as to create a condition of price stability. Now, what is "price stability," exactly? Price stability is not only keeping the rate of inflation very, very low—the FOMC [Federal Open Market Committee] has said that they'd like to have inflation over time at about 2 percent. But people also have to come to expect inflation to remain low; they have to be reasonably confident that the Federal Reserve is going to follow through on its objective. So understanding what inflation expectations are is absolutely crucial to the conduct of monetary policy.

We have a lot of information about inflation expectations from some corridors. For example, there are surveys of households where people, consumers, get to weigh in on their inflation expectations. We have a number of indicators from investment markets what investors think about inflation over time. We have forecasts from economists. But curiously, the information that we don't have comes from price setters themselves: businesses. What are their inflation expectations and what underlie those inflation expectations? And that gap in our knowledge—the depth, as you put it—was really the motivation for why we started our business inflation expectation survey.

Parker: Aside from inflation expectations, does the BIE provide any other useful information or data?

Bryan: Yeah, sure. We get a monthly reading on how business conditions are viewed by our panelists. What are their price margins? What kind of cost pressures have they been under recently? Part of our interest here is not only to gauge inflation expectations and inflation certainty of businesses, but also learn more about how firms form their inflation expectations; how they make their pricing decisions. So we ask special questions that shed light on this previously unknown part of the inflation process.

Parker: How does the BIE survey rank in terms of timeliness? Do the results get released at a time when you need them the most?

Bryan: You can't really get more timely than the BIE. It's a monthly survey. It's put out in the field about mid-month. So for every FOMC meeting we have one or two new surveys to bring to the table to help inform the decisions that the president and CEO of the Federal Reserve Bank of Atlanta, Dennis Lockhart, makes, so it's a very timely indicator.

Parker: So can you give me an example of a typical month where you use the BIE results during the policymaking process, or when you might be briefing our Bank President Dennis Lockhart?

Bryan: Well, broadly speaking, there are two pieces of information that we can bring to the table with certainty. And the first is, "What are the inflation expectations that businesses hold out over the next 12 months?" But the way that we ask the question and the way we collect the data also allow us to get a sense of how certain firms are about those expectations. So not only can we tell Dennis what businesses are expecting in terms of their cost pressure for the year ahead, but how certain they are about that. And as I said earlier, I think that is an equally important part of the definition of price stability. Not only do businesses have to have the expectation that the price pressures that they will face will be about 2 percent over the longer term, but also they have got to be reasonably confident that that's going to happen, because if they are not confident then the Federal Reserve still has a problem. Businesses are still going to be taking steps to protect themselves from inflation even though we have told them that 2 percent is our objective.

So let me ask you a question: Tell me about the BIE panel.

Parker: Well, the BIE panel consists of about 350 business leaders throughout the Southeast; mostly CFOs, controllers, accountants, people who have first-hand knowledge of the cost of a business and can comment on their expectations for how those costs might change over a given time period.

Bryan: What sorts of industries do you cover?

Parker: We cover every industry; we have 15 major sectors that we cover. The only one that we exclude is the government sector.

Bryan: What's the breakdown between big business and small business on the panel?

Parker: The panel is broken down probably about half and half in terms of large business and small business. We define large businesses as any business over 500 employees. So we have a good distribution of both.

Bryan: If a firm wants to participate and be a panelist on the survey, how would they go about contacting you?

Parker: They can just email me at nicholas.parker@atl.frb.org, and I'd be happy to speak with them.

Well, Mike, thanks for the information, and thanks for taking the time to sit down with me today.

Bryan: It's my pleasure.

Parker: Again, we've been speaking today with Mike Bryan, vice president and senior economist in the Atlanta Fed's research department.

This concludes our EconSouth Now podcast on Fed surveys and their role in policy making. For more information please see the second quarter 2013 edition of EconSouth magazine, where you will find our article on this topic. On our website, www.frbatlanta.org, you can read the full article about this topic or subscribe to EconSouth in print.

Thanks for listening, and please return for more podcasts. If you have comments, please email us at podcast@frbatlanta.org.