Can the Fed Predict the State of the Economy?

Abstract

Recent research has documented that the Federal Reserve produces systematic errors in forecasting inflation, real GDP growth, and the unemployment rate, even though these forecasts are unbiased. We show that these systematic errors reveal that the Fed is "surprised" by real and inflationary cycles. Using a modified Mincer-Zarnowitz regression, we show that the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead. We further show that even allowing for an asymmetric loss function the Fed does not appear to know the state of the economy one quarter ahead.

How well do economists forecast recessions?

“…ENDNOTES 1 McNees (1991), Fintzen and Stekler (1999), Sinclair, Joutz, and Stekler (2010), and IMF, Independent Evaluation Office (2014) also show similar results. 2 While individual private sector forecasts may be subject to various behavioural biases (Batchelor & Dua, 1995), many of these are likely to be eliminated by averaging across several forecasters.…”

The Composition of Optimally Wise Crowds

“…Further, it is not always possible to correct for biases. Forecast biases could be present but change dynamically depending upon either known or unknown variables (e.g., Massey et al 2011, Sinclair et al 2010). In such cases, one could bound individual biases but not eliminate them from the aggregated forecast.…”

How biased are U.S. government forecasts of the federal debt?

“…This broader usage of the term "forecast" is also in line with Clements and Hendry (2002b, p. 2): "A forecast is any statement about the future". For some previous analyses of these and other governmental and institutional forecasts, see Corder (2005), Engstrom and Kernell (1999), Frankel (2011), Joutz and Stekler (2000), Nunes (2013), Sinclair, Joutz, and Stekler (2010), Romer and Romer (2008), and Tsuchiya (2013). Finally, many prior studies have compared forecasts whose assumptions differ from each other.…”