Forecasting FOMC Forecasts

Abstract

Summarizing Hendry's forty years of work on taming uncertainty is and distinct: Test, test, test. Sure - but test what? Test the maintained assumptions of the disturbances. Test the parameter restrictions of a given model. Test the explanatory power of a model against a rival model. In brief, test everything that is not clear and distinct. We implement Hendry's view to forecast FOMC forecasts. Specifically, monetary policy is forward looking and, in its pursuit of transparency, it communicates its economic projections to the public at large. As a result, there is interest in whether these projections are credible. We argue that central to that credibility is the public's ability to replicate FOMC's projections using publicly available data only. In other words, is it possible to anticipate, reliably and independently, what the FOMC will anticipate for the federal funds rate? To address this question, we assemble FOMC projections from 1992 to 2017; examine their statistical properties; postulate models to predict FOMC projections; estimate the parameters of these models; and generate out-of-sample predictions for inflation, unemployment, and the federal funds rate for 2018. As the reader will soon realize, there is a lot more testing to be done.