Perspective: Time for the Fed to join the 21st century

Some of the most successful companies in the world, such as Wal-Mart and Federal Express, derive significant benefits from the information advantage they receive each and every day through the visibility of real-time data.

These benefits allow them to adjust quickly to inevitable changes in their businesses. Unfortunately, while businesses and consumers are real time, the government continues to operate in batch mode.

Nowhere is this more true than at the Federal Reserve, whose actions have a greater impact on people's lives than any other single body of governance. Briefly put, the Fed's job is to ensure a suitable temperature in the economy so that inflation expectations and unemployment migrate to appropriate levels. If you applied the Federal Reserve approach to ensuring a suitable temperature in your home, you would turn the heater on and off every three months, overheating or under-heating your house.

That's precisely what seems to happen to the economy--a not too hot or too cold "Goldilocks economy" is what, in theory, the Federal Reserve aims toward. Ironically, four of the past five tightening campaigns (1973, 1980, 1990, 1994, 2001) initiated by the Federal Reserve resulted in recession.

Only in 1994 did the Federal Reserve avoid recession and achieve the desired goal of a soft landing. Not exactly a record I would want to risk our economic future on, and yet each month we anxiously await another Fed meeting on pins and needles, dissecting whether or not the Fed, using old, stodgy data, will raise rates or hold firm.

In my mind there are three simple principles the Fed needs to adopt to regain integrity.

First, it should expand its sources of data.

Whether it be information on consumer spending, productivity or manufacturing activity, backward-looking data is only so helpful, especially given the complexity of today's global economy. Wouldn't it make sense for the government to really get online and connected like the corporations it tracks and supports?

If Wal-Mart can tell you exactly how much of which products it sells as it's selling them, you would think the government could use more real-time feeds into this data. And Wal-Mart isn't unique in these abilities; FedEx can provide real-time results on shipping operations; General Motors on car sales; ADP on employment data; Intel on chip manufacturing. The list of real-time companies goes on and on. Government entities, however, seem slow to jump on this bandwagon.

If the Federal Reserve were to combine the use of historical data with real-time feeds from a number of additional data sources, I believe there would be fewer policy blunders and a higher probability of achieving the Fed's statutory goals of maximum employment and stable prices.

Second, instead of the Federal Reserve meeting eight times per year to decide whether or not the federal funds rate needs to be adjusted, the rate should continuously adjust in real time through a closed loop mechanism.

The third and final principle would be to implement tiny interest rate adjustments.

Instead of the typical 25 basis point move, the model should move in increments as small as 1/100th of a point. The new Fed chairman wants to provide more clarity--what better way than to let people see the rate and potential rate change every day based on incoming data? This computer-based model would officially welcome the Federal Reserve to the real-time information age.

But, with all the positives of a computer-based model, the system still has to be flexible enough to allow for unpredictable changes in aggregate demand or supply-side shocks. Examples of such shocks on the demand side are shifts in consumer and business confidence and changes in lending of commercial banks and other creditors.

On the supply side, there are natural disasters, unforeseen events like September 11, disruptions in the oil market that reduce supply, and even changes in productivity growth. The Federal Reserve needs to have the ability to manually override the system, similar to how it raises or cuts rates between scheduled meetings when necessary. This flexibility is critical due to the potential for unpredictable events that could negatively impact the economy.

I believe our economy and the effectiveness of the Federal Reserve would be better served if the Fed adjusted to life in the 21st century. If not, we are likely to face more policy blunders with far-reaching consequences.

Biography
Vivek Ranadivé is founder and chief executive officer of Tibco Software.

More Perspectives

[Tadmin]

"Microwave generation" hogwash

This is typical mistake-ridden hogwash from the microwave generation. Doing it NOW NOW NOW does not always fix the problem. The economy is large and should therefore be steered, that is, adjusted, slowly - not micromanaged daily.

Consider global climate as an analogy. By similar "reasoning", if today is warm, we should change the laws today to reduce ozone-depleting pollutants lest today bring about climactic doom through global warming. But if tomorrow is cool, then we should change the laws requiring increased production of ozone-depleting pollutants lest tomorrow bring about climactic doom through an ice age.

Absurd.

As it's ridiculous to attempt to "seesaw" global climate on a daily basis, so, too, is it ridiculous to attempt to seesaw the economy. Micromanagement is not the correct technique for handling economies.

[ralfthedog]

Your title had me confused.

I was wondering what the fed had to do with generating microwaves. I was assuming it had something to do with cell phones and aluminum foil hats. :)

[Methuss]

Are you crazy?

"the [fed] rate should continuously adjust in real time through a closed loop mechanism."

That is just nuts! Such a thing would effectively eliminate fixed interest rate products. Further it would make variable rate products impossible for consumers to comprehend. Could you imagine a variable rate mortgage where the interest rate changes daily or even hourly? It would be impossible to decipher on monthly billing statement.

Frankly, that was the most retarded suggestion I have heard uttered on economy...ever.

[gbob1960]

interesting reading RE Fed

This is an interesting commentary on how the fed.

Very "eye opening"

http://www.rense.com/general29/ringring.htm

[angeloj.rossi]

Not So Fast Little Buddy!

Although I agree that the stodgy ole' guard and blundering
morons at the Fed are in need of an overhaul, the move to a Real
Time dashboard has severe exposure written all over it.

Imagine the opportunity to meddle and twist the data because of
the real time feeds of a closed system, which are just that, a
closed system. I agree that having access to Real Time data is a
good thing, but, only if it is interpreted by honorable and
forthright captains of industry. It is how you use the data,
interpret the data and make strategic decisions based on the
datat that makes the difference in a Wal-Mart, Fed-Ex or any
sccessful Corporation. We have both seen companies that make
poor decision based on the same data. This is where we get into
the real talent for decision making prowess that separates the
cream of the crop of CEO's and spearates the Fed from the real
world, unfortunatley.

There in lies the problem. There is very little intelligent and
business minded talent in the federal government.

Here is how I see this move to Real Time panning out:

First, the Fed would screw up the installation and then trash the
implementation by dolling out a "no-bid contract" to their
buddies at SAIC. The system would be plagued with cost
overruns, work order changes, changes to the application code
(mortal sin) and the final insult is that the Fed would make bad
decisions based on bad data in Real Time!

Second, the access and interpret data to adjust markets for their
own personal greed, for special interest, lobbyist's and
campaign donor payola would be too tempting, especially for an
admiinistration as corrupt as the current bunch of crooks in
office.

I agree that a Real Time system is a good idea, Vivek. However,
the business accumen and moral disciplines that are necessary
to interpret and make smart decisions (I am the decider,
remember?) represents the biggest vaccuum and largest risk at
the Fed and especially on Capitol Hill!

Unfortunately, making real bad decisions based on real time
data represents a real bad idea ;->

[fcekuahd]

Real time adjustments?

Like the ones used by traders on the Stock Exchanges that can turn small downturns into instant crashes?

I'd rather see the Feds reduced to meeting 4 times a year so the economy would have a more stable foundation.

[nuckelhedd]

Someone help this guy get his head

OUT OF HIS ASS. "The job of the fed is to maintain a temperate economy?" Is this ******** for real? The job of the fed is to illegally steal money from the american treasury and that means the taxpayers by printing money willie nilly at the request of the government and loaning us it to us (yes thats right folks the fed loans us our own money ) and charges interest on it. The 14th ammendment which was supposed to give them the right to do this and your federal direct income tax by the way, is not only unconstitutional but was never even ratified by the states. And this fact escapes this puke and all thew rest of you too you freaking sheep. (obviously if you know this then im not talking to you) Wake the hell upi people stop believing ewhat this caligula government has been spoonfeeding you through the so called public education system. We are 150th in the world by the way. Yes we are being dumbed down

[ewelch]

Holy smokes

Yeah, right. And when to we don our tinfoil hats so the illuminati
can't read our brainwaves and steal our souls?

[mooretaylor]

Need serious re-evaluation of Federal Reserve System

Vivek Ranadivé's interesting article "Time for the Fed to Join the 21st Century" does not adequately address the problem. The Federal Reserve System was spawned into existence in 1913, and since its inception has never been able to tout proudly a record of achievement in the public's interest. Through Fed policies and the inherent mathematical disadvantages of fractional reserve debt money, we have seen the value of our currency plummet 98% (i.e., a dollar in 1913 is worth but 2 cents today). In addition, frequent economic instability (one may argue "economic peril") in the form of recessions, stagflation of the late 70s, and the Great Depression of 1929 have been historical facts millions have suffered through.

Instead of tweaking the system so that the Federal Reserve, which is about as "federal" as Federal Express, can manage and utilize real-time data, let us start posing the serious question: do we really need to continue this archaic model of a central banking cartel asserting its incredibly powerful and far-reaching capacity to manage and control the nation's money-making apparatus (i.e., of course with interest charged and accumulated to U.S. taxpayers!)? Specifically, is it really advantageous to the public that macroeconomic policies, taxes, employment outlook, etc. etc. rest on the shoulders of private parties, whose interests appear not to be in the public's best interest. In other words, did we really do the right thing by handing over this most crucial Congressional function to elite private banking interests? I don't think so!

Considering the unstable economic record of the 20th century to the present, I would argue that it would be preferable to abandon the Federal Reserve System model and return to the Congress of the United States the money-making authority that the writers of the Constitution had intended it to remain.

Sincerely,


Concerned Citizen
Joliet, IL

[brandonchatham]

Beautifully Written

I agree with you 100%, that was very well written.
In 1913 our power as a people was transferred to a small number of 14-year term bankers.
In the end, he who controls the money controls the people. We do not control the money, so therefor, who controls us, the bankers.

[hemo_jr]

What We Need is Monroe-Alpha's Computer

All of these symbols, the kind that jingle and the kind that fold and, most certainly, the kind that are only abstractions from the signed promise of an honest man, all of these symbols, or more correctly, their reflected shadows, passed through the bottle neck formed by Monroe-Alpha's computer, and appeared there in terms of angular speeds, settings of three-dimensional cams, electronic flow, voltage biases, et complex cetra. The manifold constituted a dynamic abstracted structural picture of the economic flow of a hemisphere.
- Robert A. Heinlein (1907-1988)
_Beyond This Horizon_ (c. 1942)

[NoVista]

Technology trumps history?!

This article was the best comedy writing I've seen on Cnet yet!

To mention the Fed and integrity in the same sentence proves technological elitism is no match for the fraud perpetrated in 1913.

Google 'fed jekyll island' for education into the nature of the Federal Reserve _Corporation_ because that is what it truly is. Also note that the Internal Revenue Service is also a private corporation and is the 'bagman' for the Fed.

Google 'fed M3 reporting' for another lesson in Fed fraud.

Another instructive exercise is checking out the 'Plunge Protection Team'. It may explain why stock market experts were puzzled by the recent Chinese-induced dip and the unexpected rally.

Some study of the history of the income tax would be useful as well.

"Real World Economics 101" should definitely be a prerequiste to technology fixes.

The Fed was never the solution; it's the problem.

[Mark Greene]

The Fed sees WAYYYY too little oversight

We've broken the constitution to allow a secretive body of bankers
to print our currency and have strong control over our economy,
and yet they have no obligation to be at all transparent.

Seems like it might be quite the coup on their part.