Episode 19 - Colorful Books, Part I
One of the signature decorations of the Christmas holiday is colored lights. When you think of Federal Reserve publications - colorful is probably not the first word that comes to mind. But last week an announcement by the Federal Reserve brought one of the colored books back into the spotlight - The Beige Book.
Welcome to The Bankster Podcast. I’m your host, Alexander Bagehot, and this is Episode 19 - Colorful Books, Part I. Every episode we dive into what I call The Centralverse! The incredibly fascinating and ever more consequential world of central banking.
During the last few weeks billions of people around the world have begun to celebrate the annual holiday of Christmas. One of the signature decorations of the holiday season is colored lights. Strung on the gables of homes across the world and wrapped around ever green pine trees these bright lights are everywhere. I’ve travelled a bit this holiday season and it’s fun to see that even in a politically polarized and contentious time, cities around the world still put up lights and people gather to celebrate Jesus Christ, or at least Santa Claus, kindness, family, gift giving, and service.
When you think of Federal Reserve publications - colorful is probably not the first word that comes to mind. Heck, it’s probably not in the first 100 words that come to mind. But an announcement this week in regards to one of its publications reminded me of the interesting history of a set of colorful books that the Fed has published in the past. There have been red books, green books, teal books, blue books, and the most famous (yet least interesting named) beige book. The latter will be the focus of part one of the two part series I’m calling Colorful Books. On next week’s episode we will talk about the other books in the color spectrum.
The Federal Reserve announced last week that there would be significant changes to the Beige Book starting next year. During the first section of today’s podcast we'll talk about what the Beige Book is in general. Then we’ll dive into more specifics details about the publication and describe the changes that will come next year. So let’s start with the neutral colored and soon to be updated - Beige Book.
I want to start off this section of the episode, the description of what the Beige Book is, by doing something just a little bit different than what I’ve done in the past. I want to run through a brief thought exercise with you. If you are in a place where you can close your eyes, I want you to close them. If you’re driving - definitely don’t close your eyes. If you’re at work - well, I’ll leave that up to you. Ready? Imagine logging on to the website for the Board of Governors of the Federal Reserve System. What do you see? Explore the website for just a second - www.federalreserve.gov. What links are in the top and side bar menus? Click in a few of those and take note of what you’re looking at.
Ok, now we are going to leave the internet and I want you to imagine a macroeconomist. Where is she at? What is she working on? Now, open your eyes, or come back to focus. I have spent a significant amount of time on the Board of Governors website, and I studied macroeconomics in college. However, I think I’m still connected to the world outside of the Centralverse enough to be able to wager a few guesses as to what you saw in both of these imagined scenarios.
When you imagined the Board of Governor’s website, the first word that probably crossed your mind was - boring. You saw lots of long words and the best description of the design you’re looking at is probably 1994. You also probably imagined yourself clicking through regulatory report forms and financial data spreadsheets. You might have imagined a list of press releases or recent announcements about interest rates or the current level of the money supply. And you may have imagined statistics and information about the economy in general. All of these imaginations would have been accurate. The information that you imagined being there is really there. Very impressive. On to the second scenario.
When you thought of the macroeconomist you probably imagined her at a chalkboard writing out complex formulas. Then maybe she folds one arm across her chest and rests the other hand in a fist under her chin in the thinking pose. Then again, you may have imagined her at the computer typing furiously away. Maybe she was working on a statistical model or a large data spreadsheet. As in the first example, all of these imaginations would have been accurate. Macroeconomists do indeed do all of those things.
However, during the imagining of the website you probably didn’t see stories of small, rural potato farmers in Idaho or read about the light fixture manufacturers in Chicago or the hotel business executives in southern Florida after the hurricane season.
During the imagining of the macroeconomist you probably didn’t imagine her conducting and then sifting through dozens and dozens of interviews. You probably didn’t imagine her trying to write a summary of the local economy without using numbers.
In short, you probably imagined that the Federal Reserve and the economists that work there are strictly focused on numbers, formulas, and spreadsheets - what we call quantitative analysis. That is, of course, a large and very important part of the actual work that the Federal Reserve does - the majority in fact. However, one of the basic definitions of economics is the study of decision making. And who is making these decisions that are so worth studying? Well, people are. One of the dangers in the study of economics is focusing so much on the numbers that you forget that those numbers represent real people and decisions that affect real lives. That’s actually why I chose to study the field of economics.
My father was a math teacher, so with a built in tutor and educator cheerleader I always enjoyed numbers. However, for all my attempts, I just couldn’t get excited about physics and falling rocks or engineers and filling bath tubs. But when I took an economics class in High School I was introduced to the idea that the numbers that I’d loved since childhood could actually represent real people. And the numbers could represent money and how people used that money to interact with each other. My mind was opened and it literally pivoted the trajectory of my life.
The Federal Reserve recognizes that there is more to the economy than just numbers. They recognize that there has to be more inputs into the decision about interest rates than just summary statistics reports. That’s where the Beige Book comes in. It’s a different way of looking at the economy. One that doesn’t involve spreadsheets or formulas. It is something that is used alongside the spreadsheets and the formulas. It’s a great compliment to the numbers. The Beige Book is a qualitative look at the economy. In other words, it tells some of the real life stories behind the numbers.
During the research for this episode I found an especially helpful and concisely written Frequently Asked Questions about the Beige Book. Where was this FAQ you might ask? Well, it was on the Board of Governors website. There’s actually a treasure trove of information on there. It’s not very easy to find what you’re looking for, but occasionally you’ll run across something that is, well, just what you hoped existed but assumed probably didn’t. That’s how I felt when I found the Beige Book FAQ. We’ll answer four of these questions in the next section: What is it? How is the information collected? How is the information used? And What is changing?
We’ll start with the simple question, it’s one that we’ve answered on a high level but now we’ll provide some specific details - What is the Beige Book? It is a report that is released approximately two weeks before the FOMC meetings. The Board’s FAQ says, “It characterizes regional economic conditions and prospects based on a variety of mostly qualitative information, gathered directly from District sources.” The answer to the next question - How is the information collected? Is also helpful. “Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors, plus phone and in-person interviews with and online questionnaires completed by businesses, community organizations, economists, market experts, and other sources.”
So about every other month, all twelve of the Federal Reserve Banks are having conversations with all sorts of people that live and work in their district. The first group is the Board of Directors of each Federal Reserve Bank (go back to Episode 18 if you missed that one - it’s a detailed overview of who they are). The other group of people the Fed talks to while preparing the Beige Book is influential people in the community. As the FAQ mentioned, this may include business leaders, bankers, economists, and people in community organizations. How the survey is collected varies between the districts. But all of them do some variety of in-person interviews, phone interviews, and surveys. A team at each Reserve Banks then compiles all of the information for their district and summarizes it in two or three pages.
All of those individual reports from each of the Reserve Banks is combined into one big report by the Board of Governors. An executive summary type introduction is written to highlight national trends and overviews and then the report is released to the public at precisely 2pm Eastern Time.
The information is then used by members of the FOMC when deciding monetary policy or deciding what to do with interest rates. It gives the members a glimpse into how the economy looks in different parts of the country. Also, as we mentioned earlier it provides them an opportunity to hear about real people’s perspective on different sectors of the economy.
So all of that being said, what is changing? Well, before the what let’s answer the why. The FAQ sums it up with three reasons: (1) the current report has gotten just too long - the most recent Beige Book released in November was 46 pages; (2) the districts had become quite different in how they prepared and organized their portion; and (3) the districts were not covering the same topics consistently.
The changes will address all of these issues. The press release that announced the change in the 2017 Beige Books described them this way, “The modifications will standardize specific core topics included in each of the 12 Federal Reserve Bank District reports, provide a more consistent presentation of the national summary, and enhance the design of the publication.”
So there you go. The new and improved Beige Books will be cleaner, more consistent, and prettier.
Now we’ll conclude with the question that you may have been asking yourself this entire time - how on earth did the color beige become associated with this report? There are two main reasons for the name. The first is because the actual name of the report is, “Summary of Commentary on Current Economic Conditions by Federal Reserve District”. Yep, that’s awful, and leads us to the second reason - the report always had a beige colored cover when it was printed in a physical book. Simple as that. No one wanted to use the real, terribly long and boring name, so they started calling it by the color of the cover page instead.
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Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to the spirit of Christmas - whether you celebrate the holiday or not, I hope we are kinder, gentler, and more accepting. Thanks for listening. I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!