Factors influencing Federal Reserve forecasts of inflation

Abstract

PurposeThis study aims to both test the asymmetric information hypothesis and explore the factors influencing the one‐ through four‐quarter‐ahead Federal Reserve inflation forecasts for 1983‐2002.Design/methodology/approachEncompassing tests are used to examine the asymmetric information hypothesis. In modeling the Federal Reserve inflation forecasts, the authors are mindful of alternative theories of inflation which emphasize such determinants as cost‐push, demand‐pull and inertial factors.FindingsFirst, the Federal Reserve inflation forecasts embody useful predictive information beyond that contained in the private forecasts. Second, with the private forecasts controlled for, the near‐term Federal Reserve inflation forecasts make use of qualitative information, and the longer‐term forecasts are influenced by the forecasts of growth in both unit labor costs and aggregate demand as well as the preceding‐quarter inflation forecasts and monetary policy shifts.Research limitations/implicationsThe Federal Reserve forecasts are released to the public with a five‐year lag and are currently available up to the fourth quarter of 2002. This limits the use of the most up‐to‐date forecasts desirable for this study.Originality/valueThe factors influencing the Federal Reserve inflation forecasts are basically those emphasized publicly by monetary authorities. This finding points to the Fed's transparency and should thus help enhance its credibility with the public. Also, our results (which shed light on the predictive information in the Federal Reserve inflation forecasts not included in the private forecasts) are of value, since they can help the Fed better predict how inflation will respond to policy actions, and they can help the public form more informative inflationary expectations.

US unemployment rate: Federal Reserve versus private information

“…Closely related to this study are Baghestani (2008) and Baghestani and Poulson (2012), who evaluate the accuracy of Fed forecasts of unemployment and nonfarm payroll employment. Other studies are concerned with evaluating the Fed forecasts of inflation (Romer and Romer, 2000;Capistr an, 2008;Baghestani and AbuAl-Foul, 2010;Hubert, 2015;Ahrens et al, 2023), output growth (Joutz and Stekler, 2000;Gavin and Mandal, 2003;Baghestani and AbuAl-Foul, 2017), consumption (Baghestani, 2013), investment (Baghestani, 2011(Baghestani, , 2012(Baghestani, , 2021Lunsford, 2015) and real net exports (Baghestani, 2006), among others.…”

Evaluating survey-based forecasts of interest rates and macroeconomic variables

“…The relevant empirical evidence is less clear regarding other macroeconomic variables as several papers show that survey forecasts outperform model forecasts for nominal variables such as inflation, while for real variables such as output, the results are mixed (Baghestani and AbuAl-Foul, 2010; Clements, 2015; Deschamps and Ioannidis, 2013). In particular, existing research shows that survey forecasts generally tend to outperform different competing inflation forecasting methods (Ang et al , 2007; Bauer and McCarthy, 2015; Faust and Wright; 2013; Grant and Thomas, 1999; Thomas, 1999; Vicente and Kubudi, 2018).…”

“…Additionally, existing empirical evidence (e.g. Baghestani and AbuAl-Foul, 2010) suggests that private sector forecasts, such as Blue Chip consensus forecasts, are a good stand-in for the policymakers' forecasts since the Federal Reserve has not been found to possess incremental useful information about the state of the economy that is not known by the private sector. This is important because policymakers' forecasts are made publicly known sparingly and only after policy decisions are made and thus market participants can have more frequent and up-to-date forecasts regarding key macroeconomic variables.…”

Analisis Pengaruh Variabel Makro Terhadap Return Indeks Saham Syariah Di Indonesia: Studi Pada Fenomena Perang Dagang Global

“…Peningkatan nominal suku bunga menciptakan tekanan kepada harga melalui keseimbangan pasar uang, jika uang yang beredar tidak berubah (Gupta and Reid, 2013). Dengan demikian kenaikan ekspektasi inflasi dapat memicu kondisi aktual inflasi dalam perekonomian (Baghestani and AbuAl-Foul, 2010). Penargetan terhadap aktual inflasi oleh bank sentral dapat dilakukan dengan menjaga ekpektasi inflasi ini, pada gilirannya mengharuskan bank sentral memahami ekosistem perdagangan, isu perokonomian dan kebijakan-kebijakan ekonomi global (Montes and Nicolay, 2015).…”