Evaluating FOMC Forecasts

Abstract

Federal Reserve policymakers began reporting their economic forecasts to Congress in 1979. These forecasts are important because they indicate what the Federal Open Market Committee (FOMC) members think will be the likely consequence of their policies. We evaluate the accuracy of the FOMC forecasts relative to private sector forecasts, the forecasts of the Research Staff at the Board of Governors, and a naive alternative forecast. The Fed reports both the range (high and low) of the individual policymaker's forecasts and a truncated central tendency. We find no reason to consider the truncated version. We find that the FOMC output forecasts were better than the naive model and at least as good as those of the private sector and the Fed staff. The FOMC inflation forecasts were more accurate than the private sector forecasts and the naive model. For the period ending in 1996, however, they were not as accurate as Fed staff inflation forecasts.