My take: Where the Fed went wrong
In light of repeated forecasting errors, Federal Reserve (Fed) officials have been forced to frequently revise their economic projections and to radically alter their forward guidance in recent months. Importantly, monetary policy missteps were a major contributor to the emergence of a once-in-a-generation inflation shock. Consequently, the Fed has lost some credibility.
Following the Federal Open Market Committee (FOMC) meeting in May, Chairman Jerome Powell offered a clear signal that 50-basis point rate hikes should be penciled in for June and July. Yet, following a jump in consumer inflation expectations and a spike in the Consumer Price Index-based inflation rate last week, the Fed was forced to hike its policy rate by 75-basis points on June 15.
Even more awkwardly, the June 2022 Summary of Economic Projections (SEP) indicates that Fed officials have had to radically overhaul their forecasts from just three short months ago (and the March 2022 SEP itself reflected a sharp change from the December 2022 SEP). The extent of the ongoing shift in the Fed’s outlook is revealed by the fact that the median forecast in the September 2021 SEP called for just a single 25-basis point rate hike for all of 2022.
Given its stunningly poor forecasting record, the Fed needs to fundamentally rethink its approach and undertake some serious soul-searching regarding the causes of its failure. Sadly, the following quote may actually reflect the reality in economic circles: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
Developing and calibrating fanciful mathematical and statistical models to generate point estimates (that are invariably wrong) should not be the primary focus of macro analysis at central banks. In real-world policymaking, it is often better to be roughly right than precisely wrong. The Fed should hire economists with differing viewpoints and approaches and encourage open debate to avoid groupthink.
In light of repeated forecasting errors, Federal Reserve (Fed) officials have been forced to frequently revise their economic projections and to radically alter their forward guidance in recent months. Importantly, monetary policy missteps were a major contributor to the emergence of a once-in-a-generation inflation shock. Consequently, the Fed has lost some credibility.
Following the Federal Open Market Committee (FOMC) meeting in May, Chairman Jerome Powell offered a clear signal that 50-basis point rate hikes should be penciled in for June and July. Yet, following a jump in consumer inflation expectations and a spike in the Consumer Price Index-based inflation rate last week, the Fed was forced to hike its policy rate by 75-basis points on June 15.
Even more awkwardly, the June 2022 Summary of Economic Projections (SEP) indicates that Fed officials have had to radically overhaul their forecasts from just three short months ago (and the March 2022 SEP itself reflected a sharp change from the December 2022 SEP). The extent of the ongoing shift in the Fed’s outlook is revealed by the fact that the median forecast in the September 2021 SEP called for just a single 25-basis point rate hike for all of 2022.
Given its stunningly poor forecasting record, the Fed needs to fundamentally rethink its approach and undertake some serious soul-searching regarding the causes of its failure. Sadly, the following quote may actually reflect the reality in economic circles: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
Developing and calibrating fanciful mathematical and statistical models to generate point estimates (that are invariably wrong) should not be the primary focus of macro analysis at central banks. In real-world policymaking, it is often better to be roughly right than precisely wrong. The Fed should hire economists with differing viewpoints and approaches and encourage open debate to avoid groupthink.
Inflation is expected to remain high later this
year even as the economy slows and layoffs rise. Already, signs of financial
stress are surfacing.
https://www.nytimes.com/2022/06/17/business/economy/inflation-economy-recession.html
Related:
https://www.theatlantic.com/ideas/archive/2022/06/us-economy-federal-reserve-inflation-avoid-recession/661307/
https://www.nytimes.com/2022/06/17/business/economy/inflation-economy-recession.html
https://www.theatlantic.com/ideas/archive/2022/06/us-economy-federal-reserve-inflation-avoid-recession/661307/