“Captain, we’re here. Why not avail ourselves of this opportunity for study? … No other vessel has been out this far.” Lt. Commander Data, Star Trek: The Next Generation, “Where No One Has Gone Before” (1987)
If you are a student of economics – or an inquisitive android like Lt. Commander Data of Star Trek: TNG fame – then you have a great friend to help you understand the world: FRED. The Federal Reserve Economic Database (FRED for short) is provided free of charge to the public by the Federal Reserve Bank of St. Louis. FRED currently includes more than 238,000 time series from nearly 80 sources covering about 200 countries, and it continues to grow.
OK, Lt. Commander Data can’t use FRED to research a “giant protostar … in the process of forming,” but he would have a field day using FRED to learn about what makes economies around the world tick. He’d also learn about the challenges of converting economic concepts into the quantitative measures we need to assess an economy’s performance.
Economics is first about learning theory and core principles. But our real interest, especially in the study of money and banking, is about applying core principles to the world around us in order to address quantitative questions. How will tax changes affect individuals’ investment and consumption decisions and the behavior of the economy as a whole? How much does a change in central bank policy alter prospects for growth and inflation? How much capital do banks need to make the banking system safe? Answering these questions, and a myriad of others, requires a blending of theoretical knowledge with the up-to-date statistics that FRED delivers quickly and easily.
FRED provides students and professional analysts with a great laboratory to explore ideas. Here’s one example from courses that we have taught on macroeconomics and on central banking. Suppose that you have learned about various practical guides for setting monetary policy to secure price stability and keep economic output close to its normal level. The classic example, proposed by Professor John Taylor of Stanford University, is the Taylor Rule. The Taylor Rule is widely used by policymakers and by financial market practitioners as a benchmark against which to judge whether the current policy setting is relatively loose or relatively tight. It is a simple formula that relates the policy interest rate to inflation and economic output:
Policy interest rate = Equilibrium real rate of interest + Inflation + ½ (Inflation Gap) + ½ (Output Gap)
where the Inflation Gap is the difference between the annual inflation rate and the central bank’s inflation objective and the Output Gap is the percent deviation of output from its “normal” or “potential” level. Taylor estimated that the equilibrium real rate of interest is roughly 2 percent – that’s the average over a fairly long period of time in the United States.
FRED makes it easy to calculate and display various versions of the Taylor Rule. Using FRED, we have plotted the Taylor rule together with the actual policy rate. (You can find here the detailed steps for making this chart using FRED.) If you closely examine the chart below, you’ll see that there have been episodes – like the 1970s – when the Fed kept its policy rate below the Taylor Rule. That was a period when inflation rose to peacetime highs. More recently, you’ll see that the policy rate implied by the Taylor Rule fell below zero. Because the Fed can’t set its policy rate meaningfully below zero, the FRED chart helps you see why the central bank introduced a range of unconventional monetary policies – including forward guidance, quantitative easing and targeted asset purchases.
Taylor Rule and the Federal Funds Rate
We use FRED every day when we write posts for this blog, when we prepare lessons for class, or when we try to answer questions that our students and colleagues pose. We think a college course in money and banking is only really complete if it integrates data and measurement applications. This is why we have built FRED data exercises into every chapter of the fourth edition of our textbook. Fortunately, you don’t need the textbook to see the data. You can go to our published data list on FRED to see the indicators used in the textbook. Clicking on an indicator instantly produces a chart in FRED for you to examine and manipulate. We’ve also created a webpage where you can download an Excel spreadsheet with these indicators and where you can find links to tutorials that help you access, transform, and chart data using FRED.
FRED has many other virtues. You can use it on your smartphone or tablet (iOS or Android). You can use the Excel add-in to download data directly from a spreadsheet, making it easy to update. If you register for a free FRED account, you can save your datasets and your graphs for automatic updating whenever you need them. You can also customize the appearance of your graphs and apply these settings to new graphs. This is great for including neat-looking graphics in your homework (or blog).
We hope that public-sector organizations and others producing data will expand efforts to provide their data through FRED. Many already do, but they could do more. International organizations like the BIS and IMF don’t need to profit from data sales, while their own data interfaces are far less useful than FRED’s. They have comparative advantage at collecting data, but not at distributing it. [In a few cases, FRED also can learn from others: the World Bank interface currently makes it easier to compare data across countries.] We urge public-sector data collectors to provide their databases free of charge to FRED. We also encourage leading private producers of data, like Standard and Poor’s and Dow Jones, to provide the complete history of their most famous indexes to FRED without charge. This elevates their brand while helping students.
Ultimately, FRED is the most useful tool we know of to further promote economic and financial literacy. The skills in data analysis and manipulation that students can develop using FRED will serve them well throughout their lives. Like Lt. Commander Data and the Star Trek crew, perhaps their data explorations will take them boldly “where no one has gone before.” That’s how we all learn.