Since 2007, the Federal Open Market Committee (FOMC) has published individual members’ assessments of the economy in the Summary of Economic Projections (SEP). The SEP was one of Chairman Bernanke’s communication innovations in an effort to increase transparency after the 2007-09 Great Recession.
This expanded forward guidance includes predictions of the changes in the federal funds rate, GDP, the unemployment rate, personal consumption expenditures (PCE) inflation, and core PCE inflation. It’s released along with the minutes of selected FOMC meetings. Each policymaker submits an estimate for each indicator for the next three years as well as a longer-run estimate.
A recent St. Louis Fed Review article cites a survey of economists and other Fed watchers: 33% found the SEP “useful,” 29% found it “somewhat useful,” and 38% found it “useless.” Investors and economic journalists use the projections as a forecast for the economy and monetary policy changes—in particular, the federal funds rate predictions. Investigating the success of the SEP at predicting indicators could give insight into the effectiveness of this FOMC communication channel.
Thankfully, ALFRED tracks changes in policymakers’ SEP forecasts across time. By placing different vintages of predictions on the same graph (as we did above), we can see how policymakers may have shifted their views over time. Policymakers consistently overshoot the effective federal funds rate by a good margin. What’s going on there? Well, as the note on the FRED page for this series explains, the SEP tracks participant projections for the end of a calendar year. So we should use the annual and year-end settings (instead of daily data for the federal funds rate), as in the graph below.
This looks much better. FOMC predictions match the data well, especially over the short-run. (As in the first graph, the thick red line shown above is the effective federal funds rate for 2019-06-18.) This close alignment isn’t surprising, given that these are the median data points for projections and the Committee sets interest rate targets by voting. However, the median for the dot plot was tracked only beginning in 2015 and the yearly nature of the projections means a small sample size. Predictions in 2015 and 2016 favored a steadily increasing federal funds rate, but more recent predictions favor a slower increase in rates. If interest rates begin falling, the SEP may look very different.
Now let’s look at a different prediction reported on the SEP: the growth rate of real GDP. (The thick red line shown above is real GDP for 2019-06-18.) There are more data points for this graph because this measure was reported starting in 2007. A representative prediction was selected from Q4 of each calendar year for (slightly) less graph clutter. Again, policymakers’ predictions are generally closely aligned with the actual data, especially for shorter-term predictions. Between 2009 and 2014, the two- and three-year predictions tended to overshoot the actual data—that is, they were more “optimistic.” Since 2015, however, policymakers’ projections have appeared more “pessimistic” in the medium- and longer-term, trending closer to or even below the reported GDP growth rate.
How these graphs were created: For the federal funds rate graphs: From ALFRED, search for “FOMC Summary of Economic Projections for the Fed Funds Rate, Median.” Check the appropriate series in the search results and click “Add to Graph.” By default, ALFRED creates a bar chart; to change to a line graph, use the “Graph type” menu under the “Format” tab. To include the earliest vintage, click on the “Edit Graph” button, go to the “Edit Line 1” tab, and select vintage 2015-12-16. To add the next vintage, go to the “Add Line” tab, search for and select the correct series, click “Add data series,” go to the “Edit Line 2” tab, and select vintage 2016-03-16. Repeat this process until all desired vintages have been added. Then, to add the federal funds rate line, go to the “Add Line” tab, search for and select “Effective Federal Funds Rate,” click “Add data series.” Adjust the range of the plot so the start date is 2016-01-01 and the end date is 2020-01-01. For the second graph, go to the tab for the federal funds rate line (Line 12, in this case), select “Annual” in the “Modify frequency” dropdown menu, and select “End of Period” in the “Aggregation method” dropdown menu.
The process was similar for the growth rate of GDP graph, but search for “FOMC Summary of Economic Projections for the Growth Rate of Real Gross Domestic Product, Central Tendency, Midpoint” instead. Note that FRED supports a total of 12 lines, so a representative vintage from Q4 of each year was selected. To add the growth of real GDP line, go to the “Add Line” tab, search for and select “Real Gross Domestic Product,” click “Add data series,” go to the tab for the real gross domestic product (Line 11, in this case), select “Percent Change from Year Ago” in the “Units” dropdown menu, and select “Annual” in the “Modify frequency” dropdown menu. In the “Format” tab, remove the titles to dispense with the clutter from two-line legends. Finally, adjust the range of the plot so the start date is 2007-01-01 and the end date is 2020-01-01.
Suggested by Darren Chang and Christian Zimmermann.