The president and CEO of the Cleveland branch of the Federal Reserve Bank Sandra Pianalto's crystal ball doesn't extend to Europe; or if it does, she won't say what she sees there. She declined Tuesday to answer the question if the euro will survive.
“I think what is happening in Greece should be a lesson to all governments, including our own, that fiscal imbalances are unsustainable,” she said.
Ms. Pianalto's comments came after a speech on “Forecasting in Uncertain Times,” given at a lunchtime gathering in the Omni William Penn Hotel, Downtown, of the Pittsburgh Stock & Bond Association and the Economic Club of Pittsburgh. The Cleveland Fed has a branch office in Pittsburgh and serves a district that includes Western Pennsylvania.
Beginning with a quote from ever-quotable Yogi Berra – “the future ain't what it used to be” – the central banker said the recession that began in the last quarter of 2007 has so changed the economic landscape that forecasting, always a tough job, has become even more of a challenge.
Early on, the Great Recession did not conform to the models being used to make economic forecasts.
“Indeed, the second quarter of 2008 had many signs of a recovery,” she said. “Models were telling us that the recovery was beginning. After all, the average recession lasts less than three quarters.”
Ms. Pianalto listed three reasons why economists' models failed to predict the Great Recession.
First, the downward spiral of the economy – in terms of housing price declines and banking troubles – reached a scale that had not been seen since the 1930s and economists' data go back to only the 1950s.
Second, the models did not sufficiently account for the role of financial products in the economy.
Finally, the Federal Reserve's own emergency measures – such as reducing the federal funds rate to nearly zero and buying $1.25 trillion in mortgage-backed securities – were unprecedented and not predicted by the models.
With the economy having moved into unforeseen territory, Ms. Pianalto said that judgment had become paramount in economic forecasting.