Appropriate monetary policy and forecast disagreement at the FOMC

Abstract

I study the forecast updating behavior of Federal Open Market Committee members to assess how individual views on appropriate monetary policy translate into disagreement about the macroeconomic outlook. I match the cross-sectional skewness in interest rates with its inflation and unemployment forecast counterparts and apply standard panel techniques to the data. I observe that hawkish minority voters tend to forecast higher inflation rates relative to the consensus view on the future economy. A higher degree of skewness in the individual inflation forecasts can be attributed mainly to regional Federal Reserve presidents’ minority views on appropriate policy. When investigating potential forecast exaggeration due to strategic motives, however, I find significant differences in the forecast updating behavior neither for Fed governors as opposed to regional Fed presidents nor for members voting with the majority as opposed to voting against the majority nor for stayers and switchers with respect to individual monetary policy stance.