The Congress established the statutory objectives for monetary policy--

  • maximum employment,
  • stable prices, and
  • moderate long-term interest rates

--in the Federal Reserve Act.


Does the Fed ever use misinformation as a tool to help achieve these mandates?

  • 1
    $\begingroup$ I don't really understand what you're asking - this reads more like an invitation to discussion than a question about economics. What exactly is the economic principle that you're asking about? $\endgroup$ – 410 gone Oct 2 '15 at 9:57
  • $\begingroup$ Its basically a question of the fed engaging in marketing to achieve its mandates, but I'm not sure if there is an economic term for that, which is why I provided two examples. Make sense? $\endgroup$ – Anon Oct 2 '15 at 10:07
  • $\begingroup$ No, not really. $\endgroup$ – 410 gone Oct 2 '15 at 10:32

This question as is (October 2, 2015, 15:07 Athens time) should be closed and I voted to that effect. I provide an answer in order to show why it should be closed.

As any natural or legal entity, the "Fed" engages in strategic behavior. Strategic behavior is not a priori constrained by moral considerations (and this is why Game Theory has come under fire for moral reasons in a normative approach). Under strategic behavior anything goes at first, and then the actual course of action is decided based on whatever constraint the decision maker feels it has to take into account, for whatever reasons.

Therefore "manipulation of facts" of any short and to any degree may in principle be employed in order for the decision maker to (attempt to) reach its goals.

So the question as is has the above trivial and uninformative answer. It could be improved by asking, for example:

"Has there been any study that tried to assess whether "fact manipulation" was critical in achieving the goals of the Fed?"

, or

"Are there any econometric papers studying the correlation between macroeconomic outcomes and some index of "fact manipulation"?

These kinds of questions would be manageable and in principle interesting and answerable, but I personally am not aware of any such study.

  • $\begingroup$ I find this answer excellent (even if too 'trivial' for some) and cannot help but think that a question that merits this answer was also not that bad. $\endgroup$ – Giskard Oct 3 '15 at 7:13
  • $\begingroup$ @denesp. Thanks. But don't you find that my answer is more of a "meta"-one? I started to write it as a comment, but realized that it would get too big for that. $\endgroup$ – Alecos Papadopoulos Oct 3 '15 at 13:15
  • $\begingroup$ I see what you mean. The answer is very general for this question. I still think it is a valid answer to a valid (but basic or ill phrased) question. $\endgroup$ – Giskard Oct 3 '15 at 13:18

The closest thing to an answer I could give to this is that it is not in the Federal Reserve's interest to lie, particularly about the targeted inflation rate. Businesses would catch on to what the state of the economy is and the Federal Reserve would lose credibility. Too much discretion in the Federal Reserve's policy leads to Ramsey's Time Inconsistency Problem, where if the Fed kept lying about their policy, they would no longer have power even in the short run to affect employment or apply any sort of exogenous shock to the system.

The question seems to hold some sort of suspicion over the Federal Reserve, given its association to that "spooky" thing we call government, but the Federal Reserve makes its policy independent of government. Central banks need independence to operate properly, and we see in other countries where they aren't (i.e. Zimbabwe) that seignorage, debt, or unemployment can easily get out of control.

  • $\begingroup$ youtu.be/6PB2K4HQ2WM?t=3m Friedman observes in reading 50 years of Fed annual reports, that there were cyclical fluctuations of the powers of the Federal Reserves. In good years, it was due to its efficacious management of money. In bad years, despite its best efforts, outside forces combined to create difficulties. Is this reasonable grounds for suspicion? $\endgroup$ – Anon Oct 3 '15 at 1:53
  • $\begingroup$ Part of the Federal Reserve's purpose is to mitigate the bad years, but it can't account for all business cycle fluctuations. The macroeconomy is still very hard to predict. In the good years, well, of course it is trying to help and will attribute credit to itself. That's a natural bias of any institution, large scale or otehrwise, but not one that allows us to say the Fed has no positive effect on reducing volatility. $\endgroup$ – Kitsune Cavalry Oct 3 '15 at 4:04
  • $\begingroup$ Do you agree that some institutions are more biased than others, and that having a bias that specifically interferes with the accuracy of the data reported as Friedman Observed, is reasonable grounds for suspicion? $\endgroup$ – Anon Oct 3 '15 at 22:14
  • $\begingroup$ The bias makes us suspicious only in that we can't really have 100% certainty on the Fed's intentions, which is about as helpful as saying, for exampls, a model has endogeneity problems; every model has endogeneity problems, and every institution has a bias. You want to try and quantify how large the bias is? Be my guest, but if your only purpose is to present a leading argument for some sort of conspiracy, you're not doing a very good job, nor is it clear what you're trying to ascertain from us. This is the problem with questions like yours and why it violates the rule guidelines. $\endgroup$ – Kitsune Cavalry Oct 3 '15 at 22:28
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    $\begingroup$ I'm glad I could be of help. Do try to narrow the scope of the question next time a little. $\endgroup$ – Kitsune Cavalry Oct 4 '15 at 14:08

The question is not trivial. If insiders can anticipate Fed actions, they can fleece a lot of money from the public. For example, if the Fed plans on raising interest rates and tells XYZ, then XYZ can acquire a lot of say treasuries to make a big profit. There are many cases in which the Fed's actions do effect the markets, so the Fed has to be careful about what they say and by extension it is logical that they use some degree of deception.

Another example if is the Fed fears that a major bank will go down and cause a liquidity fire, they can and very well will use misinformation to underscore the risk that this bank faces. They may also overly assure other banks who are considering lending to this troubled bank the solvency of the bank in question.

For example, Fed meetings are openly recorded, but members rarely divulge their true feelings during these meetings and instead used close door sessions for this.

The Fed absolutely believes that the ends justify the means (especially when it comes to "saving the economy", but they are very secretive so it is difficult to offer a comprehensive critique of their misinformation.

  • $\begingroup$ To address your points: Even if the Fed has to be careful about what it says, they don't have to deceive people, but rather they can announce things only publicly without any secrecy, so the information is available to everyone (it's also hard to imagine why they'd favor giving info to some big company). The Fed also finds it not in their interest to lie about the liquidity of a bank (credibility and long term Nash eqbm); their whole job is to assure people that banks can handle liquidity crises by providing that liquidity. $\endgroup$ – Kitsune Cavalry Nov 24 '15 at 4:37
  • $\begingroup$ Finally, closed door meetings are there to aggregate info and prevent information from being leaked; it has to be all released at once or else it could be manipulated by individual actors/firms. Again, this is the importance of making information public unilaterally from within the organization. $\endgroup$ – Kitsune Cavalry Nov 24 '15 at 4:38

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