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Episode 21 - Colorful Books, Part III

Intro

Welcome to The Bankster Podcast. I’m your host, Alexander Bagehot, and this is Episode 21 - Colorful Books, Part III. Every episode we dive into what I call The Centralverse! The incredibly fascinating and ever more consequential world of central banking.

I was out west in the beautiful states of Arizona and Utah for the holiday break. I did a little skiing, in which I crashed more times than I care to admit. I ate way more food than I should have. And I enjoyed wonderful time with family. Most of you probably spent the last few weeks doing similar activities.

Now the New Year begins, we set a few goals, and do our best to stick with them - at least through the month of January. Anyways, thanks for listening to The Bankster Podcast. It’s been a great journey. I’ve learned a lot. I look forward to seeing what 2017 has in store!

Over the break most Central Bankers were also on break, so there wasn’t a ton of news coming out of the Centralverse. So for this episode we are going to talk about a few things that change at the Federal Reserve on January 1st.

Then for the history section we are going to finish the Colorful Books series. Today we will discuss the Blue and Green Books and how they became the Teal Book. So first, let’s talk about the scheduled changes coming to the Fed.

News

At the first FOMC meeting of each calendar year (January 31 for 2017) the federal reserve changes quite dramatically. When the Board of Governors is completely staffed a full third of the voting members of the FOMC changes. The FOMC, when at capacity, has 12 voting members. So that one third equates to four of the voting members change every year. And with the two vacancies on the current Board of Governors the percentage change is actually significantly greater.

Let's do a quick recap on the FOMC. There are 19 members in total. Seven governors and twelve federal reserve bank presidents that attend all of the meetings. However, only twelve of the members have a vote during any given year.

Seven votes go to the governors and five votes go to the Reserve Bank presidents. The governors and the president of the New York Fed never change- they always get a vote. That leaves four rotating positions, which are shared by the remaining 11 bank presidents. However, the current rotation is not distributed equally.

The eleven reserve bank presidents are divided into four groups. Three of the groups have three presidents and one group has two. If you're following along with all of these groups and membership numbers and are good at counting along while you're doing whatever else you're doing right now (the beauty of podcasts), then you'll see that the last group only has two members.

So you might think, well maybe they rotate who is in which group every year, right? Well, wrong. The groups do not change from year to year. So Chicago and Cleveland are the lucky members of the group of two. They get a vote every other year, while the rest of the groups only get a vote every third year.

Now don't worry if you don't remember all of those numbers - memberships - and rotations. I've made another handy chart that shows this in an easy to read format for the visual learner. How can you get this chart you may ask? Well, by signing up for the show  notes on my website. And in the age of hacking, etc I feel obligated to say that I will never share your email with anyone for any reason. And my website is hosted by squarespace which provides encryption and protects my data and yours.

Anyways, the four new voting presidents are: Chicago, Philadelphia, Minneapolis, and Dallas. And as a very interesting article from the Wall Street journal pointed out last week, three of these new voters are actually first time voters and none of them are economists. Of the four, Chicago's Charlie Evans is the only returning voting member that has voted before and the only trained economist.

Also, as we discussed on Episode 18, Donald Trump will be able to nominate two governors to the Board within the first few weeks of his presidency. This will add additional new voices to the monetary policy round table. I'll keep you up to date as those changes occur and what they mean for the future of the Fed in 2017.

Now onto the final segment in our Colorful Books series. We'll end the series with the Green, Blue, and Teal Books.

Green, Blue, and Teal

Before we jump into three actual books, their purposes, and their histories let’s remind ourselves of the high level reason behind these colorful titled books. Where are all of these books going and who’s publishing them? These are important questions and the underlying reason behind the colorful books is vital to the Federal Reserve. We’ll answer the latter question first. The books on today’s episode are all prepared by the staff economists and statisticians at the Board of Governors in Washington DC.

The information is gathered, analyzed, and described in the respective books in preparation for each of the FOMC meetings. The information, now in Book form, is delivered to each of the members of the FOMC. They are able to review the material and it helps them prepare for the actual meeting where they will make their decision about whether to raise, lower, or leave unchanged the interest rate of the Federal Funds Rate. These books also help policy makers decide whether other unconventional policy actions are appropriate.

One final note on these books before we continue. Unlike the Beige book, which is published two weeks before each FOMC meeting and is made available to the public immediately, the Green, Blue, and Teal Books are highly confidential and only available to the highest level officials at the Board of Governors and at the Reserve Banks.

So with that foundation about where the books come from, who reads them, and why they’re important, let’s spend a few minutes describing the specifics behind each of the remaining three. After describing the books I will share with you the way that I keep track of all of these current Fed books.    

We are going to start with the oldest publication in the Colorful Books group - the Green Book. Officially titled, “Current Economic and Financial Conditions” the Green Book was started in June of 1964. The idea was to formalize and compile a record of all of the economic data that had come out in the previous six weeks since the last FOMC meeting. The Green Book contains lots of summaries of data, both publicly available data sets - like government published statistics about housing, financial markets, manufacturing, unemployment, etc. as well as internal data sets that only the Federal Reserve has.

The Green Book was delivered to the members of the FOMC seven days before the meeting. This allowed each of the Reserve Bank Presidents and Governors and their respective staff to review and digest the information.

The Blue Book was delivered to the members of the FOMC just one day later - so six days before the meeting. It was started in 1965 under a different name, but in 1981 it adopted its most descriptive title, “Monetary Policy Alternatives”. The Book normally contains three potential actions that the FOMC could take. On the spectrum of policy views, one potential action is normally more hawkish, another dovish, and the third somewhere in between.

So you can probably see how well these two books go together. The Green Book provides an explanation for what the economy currently looks like and the Blue Book provides some potential answers to the question, “What do we do with all of this information?” The books went so well together that the Fed decided in 2010 to actually combine these two books into one. I bet you saw this coming.

Yep! The colors green and blue, when combined make teal. So naturally the new pre-FOMC meeting, economist prepared document would be called the Tealbook. The official title is “Report to the FOMC on Economic Conditions and Monetary Policy”. It’s a hefty internal publication and very valuable to the members of the FOMC and their close staff. Each Tealbook is not released to the public for over five years after its publication.

And there you have it. Over the past month and a half we have reviewed the five colorful books in the Fed’s FOMC preparation publications: The Beige, Red, Green, Blue, and Teal Books. To finish off the series I am going to share with you how I remember which book does which.

Beige Book - Simple, plain color, so no numbers - just stories

Green Book - It’s about the economy - about money. And what color is money - green of course!

Blue Book - It’s about the future. Think of the sky. Looking out into the future, what are the potential policy moves that the FOMC could make.

Teal Book - Well this is the easy one, it’s the combination of the Green and Blue and books.

That concludes our series on the Federal Reserve System’s Colorful Books. I hope you’ve enjoyed hearing about the different publications that are literally shaping the way our economy unfolds.

Conclusion

As always, send in your comments and questions about the Centralverse or the Bankster Podcast via email (alexander@thebanksterpodcast.com) or Twitter or Facebook. Open up your podcast app right now and give the podcast a rating and a review.

If you go to my website, www.thebanksterpodcast.com you can sign up to receive the show notes to today’s podcast and every future podcast directly in your inbox. It’s a great way to follow up on the content that we discuss and to look deeper into the Centralverse. The show notes to this episode will also include an easy to read, and updated from last week, chart that explains all five of the different Colorful Books that the Fed has published, past and present. I will also include an article in the shownotes this week that shares the story behind two bonus colors used by the Federal Reserve Bank of New York - the White Book and the Black Book. So make sure to go to the website and sign up for the shownotes to hear about the bonus material.

Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to each of you - may your 2017 be filled with happiness and success. Thanks for listening! I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!

Episode 22 - [Laughter] and the Centralverse Sourced

Episode 22 - [Laughter] and the Centralverse Sourced

Episode 20 - Colorful Books, Part II

Episode 20 - Colorful Books, Part II