The 12 banks in the Federal Reserve System all conduct extensive regional economic research. How does this serve the Fed’s broader mission, which is to limit inflation (its target is 2%) and promote maximum sustainable employment?

We asked economist Jeff Thompson, director of the New England Public Policy Center at the Federal Reserve Bank of Boston. He told us regional economic research fills critical data and information gaps. He said it also helps the Fed spot broad trends before they surface nationally.

Our focus today is on regional research, but let’s start with a foundational question: What’s the general purpose of Federal Reserve research?

The quick answer is that it’s vital to the System’s pursuit of the Fed’s “dual mandate,” which is to promote stable prices and maximum employment. Both objectives call out for research.

For instance, we’re asking things like, “How does current employment look, relative to what we think of as a maximum, feasible employment?” and “Where are prices relative to a degree of price change that we think of as stable prices?” Research helps us get to that, but it also helps us understand the dynamics of the many moving parts of the economy in response to policy changes or economic shocks. We need to understand how firms and households are going to respond – in what direction, in what magnitude. We can’t do that without research.

So, where does regional research fit in?

I think a lot of people are used to the Federal Reserve System’s “top-down” approach to research. By that, I mean we use models to understand high-level macro trends, like national unemployment or consumer spending. But we also do a lot of research that looks at the economy from the bottom up – it’s the only way to get a comprehensive view of how things are going. To do that, we parse the economy into all sorts of different sectors, and one of them is by region. And when we add up what’s going on in the regions, we get a sense of the totality of the national economy.

I’d add that regions are also important laboratories for the policy changes you might see on the regional, state, and city levels. When we study these smaller geographies, and the policy changes and economic shocks that are happening there, we get a better sense of how workers and firms generally behave.

Is there a basic philosophy behind regional research?

No matter what we’re looking at – our region or the nation – the dual mandate is guiding our work in a very real and important way. But we also want to provide helpful information to folks in the region. So, for example, in New England, maybe we’re looking at higher education or housing affordability, two big issues here. We're trying to thread that needle, doing work that speaks to the dual mandate, speaks to our mission, but also provides add-on benefits for the region.

Every region has unique characteristics, based on geography, climate, history, etc. Do these come into play when you decide what you want to look into?

Yes, absolutely. Consider some of the traits that make New England stand out. I'll give you three real quick: aging, education, opioids. Those three aspects of New England have informed quite a bit of our work in recent years. For instance, we’ve studied how higher educational attainment correlates to future wage growth. We’ve looked at the impact of our aging workforce on labor force participation. We’ve looked at the extent to which treatment methods for opioid abuse disorder might help folks who suffer from it return to the workforce. So, we’ve found ways to explore prominent issues in the region, and we tackle those questions through the prism of the dual mandate.

You’re describing a more specific and “on-the-ground” approach that fills in some gaps that the Fed’s broader national research doesn’t address. Is that accurate?

Well, without the regional research the Fed would certainly have a diminished understanding of the economy, in terms of seeing nuance and getting insight into fresh economic developments that haven't yet filtered through to the national level data. And policymakers would be operating with much more of a lag.

What do you mean?

So, actual on-the-ground activity – such as me going to Target and getting groceries – will all show up in the data eventually. Target reports their financials, and they share their revenue totals with their investors, and eventually it shows up in the data. But the activity happens well before then. And so, by us being in the region, and understanding the economic trends in the region, and talking to people around the region, we're getting a sense of what's going on in the economy before it shows up in the data.

You can't do that at the national level. From Washington D.C., you can't possibly have that type of on-the-ground familiarity with the local patterns and trends nationwide that allow you to figure out what's going on in the economy well before it's in the data. Without regional perspectives, the Fed would be much slower on the uptake on a number of important economic developments. And sometimes it is the human connections we make, whether it's a given firm or a given set of workers, that really helps us understand how important the trends are and their real meaning.

Related: Read "Why do countries need a central bank?" with Boston Fed economist Jenny Tang.