Are the Fed’s Economic Projections Any Good?
The Federal Reserve is barely challenged in the court of public opinion. The latest Summary of Economic Projections, which the Federal Reserve Board members as well as the bank presidents, published last week, illustrates how a handful of central planners influence the world. They start by defining “appropriate monetary policy,” in the absence of further shocks to the economy, as:
the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the statutory mandate to promote maximum employment and price stability.
Each participant is said to look at various data points, considering a wide variety of information, to arrive at their projections used to shape monetary policy. The specific details of their data are not disclosed to the public.
Here’s a snippet of Table 1 which shows the median figure of various predictions between 2021 to 2023, as well as the “long run,” which is not defined in the report.
The list of variables used by the Fed can be refuted in countless articles published by the Mises Institute. Just a few weeks ago, Frank Shostak wrote What Does GDP Really Tell Us?. The Unemployment Rate is a 2 min video that Mark Thornton made several years prior, still relevant as ever. Both discuss how government statisticians “concretize” a fiction into economic policy. The other two variables in the table above, the PCE and Core PCE inflation, fall under the dubious 2% inflation target, of which its origins and rationale have yet to be explained by the Fed.
Looking below at Figure 2, we find one of the most famous economic projections in the world, known as the “Dot Plot.” It illustrates the same time frame as Table 1, except it allows participants to visually plot where they expect the Federal Funds to be in the future. Here we can visualize the efforts of the Fed, specifically how they have no real accountability. If all members were to plot their dots in the long run at 4% or 0%, it will have just as little meaning as plotting between 2% and 3%, as they do below.
The last page of the report, under Forecast Uncertainty, explains how these projections aid the public on their understanding of policy actions, yet also notes:
Considerable uncertainty attends these projections… The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events.
The projections, like the methodology itself, are prone to bias, error, and fallacious reasoning, ultimately amounting to nothing more than guesses. Yet it’s believed this is all part of the planning process. It would be easy to reject the Dot Plot as an inconsequential forecast. But it goes much deeper and not worthy of dismissal.
These economic projections represent the work of just over a dozen bureaucrats, the vast majority of whom can hardly be identified. These unelected officials make predictions that are often wildly off. But the consequence of error, or “bad policy,” is not paid by those who are wrong.
As for the “long run,” it can be likened to a carrot on a stick, having an objective never meant to be achieved. In the absence of further shocks, we are told, rates will go up to around 2.5%, sometime after 2023. We must be cautiously incredulous as to the likelihood of achieving this.
Consider, we are now in 2021; the money supply, Fed’s balance sheet, stock market, national debt, and arguably the cost of living are all at all-time highs. Rates at 2.5% today would be unfathomable. How then do we confront the absurdity, and possible blatant lie by the Fed, that by 2024, or some time after, rates will be higher once again?
Maybe that’s why they caveat predictions with: “in the absence of further shocks.” As long as there is an ever-looming crisis, and the world remains on the edge of bankruptcy, rates can remain low, therefore the Fed can stay relevant.