It's also worth mentioning that my staff and I don't rely exclusively on the data to form our opinions. Because the Sixth Federal Reserve District is a pretty significant portion of the national economy and resembles the nation overall in industry composition, we go to great lengths to generate grassroots economic intelligence that supplements our analysis of the incoming data.

Once, again, we've issued guidance to the banks about encouraging lending to small businesses and have trained our own examiners to take a balanced perspective, that they not over-penalize loans to small businesses. And we are trying to get as much feedback as we can. For example, we have inserted questions in the NFIB survey to get back more information from small businesses about their credit experience. And currently our Reserve banks around the country are holding meetings with small businesses, banks and community development groups to try to understand better what the issues are and how we can improve small business lending.

In response to a question about the Fed's efforts to stimulate small business lending

For Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, chocolate isn't as sweet as it used to be: The cost of almost every ingredient has gone up. ``Commodities across the board have pressured us,'' said Bryan Merryman, the chief financial officer of Rocky Mountain Chocolate Factory Inc., as he led Hoenig on a two-hour tour of the company's Durango, Colorado, factory this week. ``There are a lot of pressures in our system that we haven't seen before.''...``When you see a business like this one, where everything it uses has been accelerating in price, you see what it does to a business person,'' Hoenig, 61, said. The July 15 visit ``reinforced the way I think, because I'm on record as being concerned about inflation,'' he said.
...
Anecdotes like the ones gathered at the Rocky Mountain factory make their way into the Fed's so-called Beige Book report and are a part of a give-and-take process of gathering and sharing information, Hoenig said. ``The Fed is not just a Washington-centric institution,'' he said. ``It's an institution that has 12 regional banks reaching out for information and sharing information with citizens.''...``What the reserve banks hear from their contacts can provide the Fed with an early warning of changes that may not show up in the published statistics for several weeks or even months,'' said Al Broaddus, former president of the Richmond Fed.

As reported by Bloomberg News.

Nationally, 278 private citizens--including business people, bankers, nonprofit executives, and community, agricultural and labor leaders--serve on the boards of our 12 Banks and their Branches. These individuals provide us with extensive and current information about economic conditions from a unique local perspective. Often, they provide an early warning of shifting economic conditions before they show up in official government statistics. I commend them for their service to both the central bank and our nation.

We're going to look at data as it comes in, and in these times we take very seriously anecdotal information that we get from various contacts across the country.

From Q&A session, as reported by Bloomberg News

However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country.

The Board staff employs a variety of formal models, both structural and purely statistical, in its forecasting efforts. However, the forecasts of inflation (and of other key macroeconomic variables) that are provided to the Federal Open Market Committee are developed through an eclectic process that combines model-based projections, anecdotal and other "extra-model" information, and professional judgment. In short, for all the advances that have been made in modeling and statistical analysis, practical forecasting continues to involve art as well as science.

[T]he emphasis of our policy analysis and our policy decisions must be on what serves the best interests of the nation as a whole. But the Directors’ independent assessment of conditions in specific regions and specific industries often gives us insights into developing trends that the national data may not reflect for weeks or months.

Each month, as I prepare for an FOMC meeting, I spend a great deal of time talking with CEOs and CFOs of companies to gather their impressions of the current state of the economy. To prepare for this last FOMC meeting, for example, I spoke to the leaders of companies whose annual revenues aggregated to a little over $1 trillion and whose operating income easily exceeded $110 billion last year. In these monthly interviews, I ask about activity and trends in their businesses and what they see happening with their production lines, customer bases and competitors in hopes of gaining insight into current growth and inflation dynamics in the economy. Recognizing the limits and risks of anecdotal evidence, even coming from the most disciplined and experienced corporate operators, I personally find this an effective way to bridge the gap between what our economic models tell us—based as they are upon historical data and various theoretical assumptions about the future—and what is happening in the real economy.

You might think of the statistical data that we gather on the economy as being like the readout on your car's dashboard: All of the information is meant to tell you what is happening to your car, but it typically does not tell you why it is happening. When the oil light on your car's dashboard comes on, you know that the oil level is probably low, but you don't know why. Maybe there's a leak, or maybe your mechanic left the cap off the reservoir. To find out, you have to look under the hood.

Meeting with people is my way of looking under the economy's hood. The conversations enable me to understand the why behind the what. They help me judge which of the various explanations being offered for the condition of the national economy is most reasonable.

A finding of the optimal control literature is that when a policy authority uses all available information as efficiently as possible in pursuing its goals, simple correlations between observable variables and goal variables may go to zero... This is a familiar proposition in the securities markets, where it is stated as the efficient markets hypothesis. Observable information should be quickly reflected in securities prices, leaving no risk-adjusted profit opportunities from trading on publicly available information. There is, of course, an opportunity to exploit nonpublic information.

...The Federal Reserve has an extensive process of gathering anecdotal information from business contacts. Much of this information is published in the Beige Book two weeks before every FOMC meeting. The policy model I’m sketching certainly leaves room for greater and more systematic effort to gather and exploit anecdotal information.

Statistical studies to detect pass-through from recent energy price increases have failed to show significant effects in U.S. price data but stories about widespread pass-through are becoming increasingly common. We may—and I emphasize “may” because my purpose is to make a general point and not to conduct a full analysis of the current situation—face more inflation pressure than currently shows up in formal data.

Accordingly, for me, the critical indicators in the time ahead will be the ones that signal whether growth is indeed likely to proceed at a sustainable pace and whether inflation remains on a favorable track. This is a judgment my colleagues and I will need to make meeting by meeting as the incoming information--both the data and, critically, the timely feel for developments that we get from the Reserve Banks' contacts in the community--help us assess the paths for the economy and price pressures.

We need to find forward- looking measures of inflation. We rely a lot for that on anecdotal reports, for example, contracts that are being signed in advance. We get information from our directors and our business contacts that give us some indication of what's going on ahead. That's part of it. Another part of the story is productivity. Wage growth is fine if it's covered by productivity growth and you don't get it into prices. So we try to look at what's going on with productivity.

I draw two lessons from that late '90s experience [the changing view of productivity growth]. The first is that you don't just look at the conventional measures, you look at the data quite deeply and try to understand how the data are constructed and how they relate to each other, because there may be anomalies that'll be instructive. And that was the case in the late '90s. The other is that published government data is not the only source of information. It's also important to talk to people in the marketplace, to talk to business people.