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It’s tough to make predictions…especially about the future

FRED recently expanded its collection of FOMC projections. These forecasts include the input of all FOMC participants, who use different statistical models and may also have different assumptions about economic factors related to the forecast. One example is the price of oil: The economic outlook changes as the price of oil changes, but no one really knows where that price will be a year from now. So a forecaster must make some assumption about the price of oil if it’s an input in his or her forecasting model. The same applies to many other assumptions about other related factors.

The graph above shows the range of these forecasts among the FOMC participants for GDP growth over the next few years. The wider the range, the more uncertain the outlook. As we can see, this range becomes slightly wider the farther we go into the future.

You may also wonder why there’s a forecast for 2015 when we’re already in 2016. Don’t we know what happened in 2015 yet? Not quite. Because these forecasts pertain to the growth rate from the fourth quarter of one year to the fourth quarter of the next year, we need to wait for the year to be over and then for the statistics to be released. That takes time. Moreover, the first data releases are subject to revisions—sometimes substantial ones. Also, these projections in the graph are based on the last available release from the FOMC, which in this case was in December 2015, which was based on forecasting exercises that were made even earlier. (This description won’t apply well, if at all, if you’re reading it a few months after it was posted.)

How this graph was created: Start with the FOMC projections release, click on the “GDP” tag, select the series you want, and click “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GDPC1RH, GDPC1RL, GDPC1RM

The long and the short of FOMC projections

For several years, FRED has included the FOMC’s projections for the main economic aggregates. FRED recently added data on projections for the federal funds rate, one of the main policy targets considered by the FOMC. Several projections are recorded, with the two main categories being short run and long run. The graph above, which shows current data, deserves an explanation because the time stamps for the data points on each series have a very different meanings.

The blue line depicts the FOMC’s forecasts of the federal funds rate for the short run: Each data point corresponds to the first of the year for each year within the “forecast window.” This window begins at the time the forecast is made and extends three years ahead: The latest forecast covers Jan. 1, 2015, through Jan. 1, 2018. Thus, it shows how the FOMC believes the federal funds rate will evolve over the period. When the next forecast is released—for Jan. 1, 2016, through Jan. 1, 2019—this entire series could change, depending on what FOMC members see through that window.

The red line is another story. First, it applies to a more distant future, showing what the FOMC believes will be the long-run federal funds rate, beyond four years from now. Second, the data points correspond to when the forecast was released. Today, this series includes a total of three forecasts, each made at different points in time for the same object: what the federal funds rate will be beyond fours years from now. With the next release, one more data point will be added to this series.

How this graph was created: From the release (see the above link), select the desired series and click “Add to Graph.”

Suggested by Christian Zimmermann

View on FRED, series used in this post: FEDTARRM, FEDTARRMLR

Four shades of inflation risk

The St. Louis Fed recently released a price pressures measure that calculates, among other things, the likelihood inflation will run above 2.5% over the next year. Related measures capture probabilities for deflation and lower inflation—between 0% and 1.5% and between 1.5% and 2.5%. By the way, the relevant index is not the consumer price index (CPI), but rather the personal consumption expenditures price index (PCEPI), which is used by the Federal Reserve for its 2% inflation target. Take a look at this Economic Synopses essay for more details.

In the graph above, we represent price pressures with a stacked graph. The series with the highest inflation is on top; in this case, green indicates the Fed is right where it wants to be in terms of inflation, red is too high, and yellow or pink is too low. The graph shows that, except for the period around the financial crisis, there has never been as much risk of deflation as now, even if the risk is still moderate. But there is also historically low risk of elevated inflation.

How this graph was created: Search for “price pressure” and select the four series. Under graph type, choose “Area” with stacking set to “Normal.” Then order the series so that deflation is at the bottom and inflation above 2.5% is at the top. Finally, replace FRED’s default colors if you prefer others.

Suggested by Christian Zimmermann

View on FRED, series used in this post: STLPPM, STLPPMDEF, STLPPMLOW, STLPPMMID

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