Forecasting the Forecasts of FOMC Members
Peter Tillman:
Fed forecasts: Prudent guidance or pure guesswork?: Richard W Fisher, president of the Federal Reserve Bank of Dallas and a member of the FOMC, presented his views on [FOMC members'] forecasts. He argued that “at best, the economic forecasts and interest-rate projections of the FOMC are ultimately pure guesses”… tactical judgements of the moment, made within a broader strategic context” (Fisher 2012)…. [T]o what extent is Fisher’s claim supported by the data?…
Gavin and Mandal (2003)… show that the FOMC’s real growth forecasts are at least as good as those provided by the private sector. The inflation forecasts were more accurate than private-sector forecasts. In light of these findings, Fisher’s (2012) first conjecture seems less convincing.
But what about Fisher’s (2012) other claim that forecasts are “tactical judgements of the moment”… that members pursue strategic motives to have an additional leverage on policy decisions of the committee. McCracken (2010)… argues that hawkish members have an incentive to forecast high inflation…. He finds that for inflation, the midpoint of the trimmed range, ie the outlier-adjusted range, is a more accurate predictor than the midpoint of the full range. Hence, controlling for outliers improves the accuracy of the FOMC's inflation forecast….
In a new data set, Romer (2010) managed to collect individual forecasts for a set of key variables for the period 1992–2000…. Tillmann 2011 uses the rotating voting right to identify strategic motives…. The incentives to pursue strategic motives are stronger for members without a direct say on policy…. [N]on-voters systematically over-predict inflation relative to the consensus forecast if they favour tighter policy and under-predict inflation if they prefer looser policy…. [T]he inflation forecasts exhibit strong evidence of anti-herding, ie FOMC members intentionally scatter their forecasts around the consensus…. Taken together, there is indeed evidence suggesting that motives other than forecast accuracy play a role…
