FOMC Consensus Forecasts

Article excerpt

In November 2007, the Federal Open Market Committee (FOMC) announced a change in the way it communicates its view of the economic outlook: It increased the frequency of its forecasts from two to four times per year, and it increased the length of the forecasting horizon from two to three years. The FOMC does not release the individual members' forecasts or standard measures of consensus such as the mean or median. Rather, it continues to release the forecast information as a range of forecasts, both the full range between the high and the low and a central tendency that omits the extreme values. This paper uses individual forecaster data from the Survey of Professional Forecasters (SPF) to mimic the FOMC's method for creating their central tendency. The authors show that the midpoint of the central tendency of the SPF is a reliable measure of the consensus, suggesting that the FOMC reporting method is also a reliable measure of consensus. For the dates when both are available, the authors also compare the relative forecast accuracy of the FOMC and SPF consensus forecasts for output growth and inflation. Overall, the differences in forecast accuracy are too small to be statistically significant. (JEL C42, E17, E37, E52)

Federal Reserve Bank of St. Louis Review, May/June 2008, 90(3, Part 1), pp. 149-63.

In a November 14, 2007, press release, the Federal Open Market Committee (FOMC) announced a change in the way it communicates its view of the economic outlook. With the release of the minutes of the FOMC meeting of October 30-31 was a Summary of Economic Projections that included explicit multiyear forecasts for real gross domestic product (GDP), the fourth-quarter average unemployment rate, and two measures of consumer price inflation-the chain price index for personal consumption expenditures (PCEPI) and the same measure excluding food and energy (core PCEPI).1 The FOMC also added a 3-year-ahead forecast. For the October meeting, they made forecasts for calendar years 2007 through 2010. The FOMC will release projections for these calendar years with the minutes of FOMC meetings held in January, March, and June. At the October 2008 FOMC meeting, they will extend the forecasts to 2011. The projections will be supplemented with summaries and explanations of the projections, including more information about the dispersion of views among the FOMC participants. This change was made to improve communication about monetary policy and to further increase the transparency of the policy process.2

Currently, the FOMC issues a statement following each policy meeting that contains a decision about the federal funds rate target and a brief analysis of the economic risks as seen by policymakers. Market observers monitor these statements closely, looking for clues about future policy moves and the FOMC's beliefs about the economic outlook. Sack (2007) describes a recent survey in which Macroeconomic Advisors LLC asked 61 "very active players" in the fixed income market what changes they would like to see in the Fed's economic forecast.3 They replied that they would like more of everything-more variables to be forecasted, forecasts of more years out into the future, and more details and insights about the reasons for the changes in the forecasts. The enhanced projection process should help to quantify the risks and explain the nature of uncertainty in the policy statement.

FOMC forecasts are important because they contain information about the FOMC policy preferences. Most important of these is the FOMC's implicit inflation objective. Monetary policy is the main factor determining inflation in the long run. The near-term outlook for inflation is affected by all the economic shocks hitting the economy. But the aggregate effects of such shocks decay quite rapidly if they are not accommodated by monetary policy. The newly available 3-year-ahead forecast adds more information about the FOMC's desired inflation objective because, as the horizon gets longer, the forecast becomes more a projection of these preferences. …