We are not alone in this.
Questioning the accuracy of the Federal Reserve Bank's data has become almost a national pastime. And it should be.
The Fed’s ability to construct and maintain financial and economic models is much more than a subject of intellectual curiosity. Given that Fed-approved models at the heart of the so-called Basel capital standards proved to be spectacularly wrong in the run-up to the last financial crisis, the new report is more reason to wonder why anyone should expect them to be more accurate the next time.
"The Fed Is Stressed Out," is the story line in today's WSJ Opinion piece.
According to the inspector general, “The governance review findings include, among other items, a shortcoming in policies and procedures, insufficient model testing” and “incomplete structures and information flows to ensure proper oversight of model risk management.” These Fed models are essentially a black box to the public, so there’s no way to tell from the outside how large a problem this is.
This is all about those stress tests the Fed has conjured up to test what would happen to each bank in an economic downturn. In short, it's a solvency standard of sorts. And it's precisely that prepositional phrase of sorts that should trouble you.
Much of the Fed's data, it turns out, is of sorts.
As the Journal notes, the Fed is enormously powerful with little to none accountability. But the Fed's mandate has changed. Broadened is a better term, into vast regulatory powers, leaving an age old question: Who's watching the watchers?
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