Tags: fed | Economic | Projections

Fed's Economic Crystal Ball Is Cracked

By    |   Friday, 04 November 2011 08:12 AM

“There you go again.”

The 40th President of the United States, Ronald Reagan, uttered those words 27 years ago while debating former Vice President Walter Mondale during the 1984 presidential debates. Four years prior, he did the same versus his 1980 opponent, President Jimmy Carter.

The phrase remains ominously prescient as we examine the recently release economic forecasts provided by the Federal Open Market Committee (FOMC) of the Federal Reserve Board of Governors.

Each quarter, the FOMC provides economic projections for GDP, inflation, and unemployment for the current year and the following two years. During the past few years, the FOMC has assembled a rather ominous record: overly optimistic projections that consistently require subsequent reductions.

This week, the Federal Reserve Bank released its October 2011 economic projections for the years 2011 through 2013.

According to The New York Times, “The Federal Reserve significantly reduced its forecast of economic growth through 2013, acknowledging that it had once again [emphasis added] overestimated the nation’s recovery from the 2008 financial crisis.”

The New York Times continues:

“The central bank predicted that the economy would expand 2.5 percent to 2.9 percent in 2012, well below its June projection of 3.3 percent to 3.7 percent. For the following year, 2013, the Fed predicted growth of 3 percent to 3.5 percent, down from a range of 3.5 percent to 4.2 percent.”

“The unemployment rate, it predicted, would still be at least 8.5 percent at the end of 2012, at least 7.8 percent at the end of 2013 and at least 6.8 percent at the end of 2014. Such reductions probably would come in part from people abandoning the search for work, [emphasis added] rather than those finding new jobs.”

“The unemployment rate was 9.1 percent in September. The government will release October figures on Friday.”

These erroneous economic projections provided by the Federal Reserve Board continue, deeming impotent its prognosticative prowess, as I described in this publication 3 months and 6 months ago.

The June 2010 minutes of the Federal Open Market Committee include the following assessment of the uncertainty involved with its economic projections:

Average Historical Projection Errors (percentage points, plus or minus)

Variable 2010 2011 2012
Real GDP Change 1.0 1.6 1.8
Unemployment Rate 0.4 1.2 1.5
Inflation Rate 0.9 1.0 1.1

“[This table] summarizes the average historical accuracy of a range of forecasts, including those reported in past Monetary Policy Reports and those prepared by Federal Reserve Board staff in advance of meetings of the Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty [emphasis added] associated with economic forecasts.”

Note: the size of the error increases over time.

That is, the 2010 projections for 2012 have a greater degree of error than those for 2010.

More dismal is the report issued in 2007 by the Federal Reserve Bank detailing the high degree of uncertainties in their economic projections for the 20 year period 1986-2006.

Appearing in the Finance and Economics discussion Series for the Divisions of Research & Statistics and Monetary Affairs at The Federal Reserve Board, David Reifschneider and Peter Tulip published a 2007 report entitled, “Gauging Uncertainty of the Economic Outlook from Historical Forecasting Errors.”

Their 20 year analysis suggests the average error for GDP growth, unemployment, and inflation for the current year are1.0, 0.3, and 0.5 percentage points, respectively. By the fourth year, these errors rise to 1.5, 1.0, and 1.0 percentage points, respectively.

The message:

The Federal Reserve Board has little credibility with respect to economic forecasting.

The policy mission for The Federal Reserve Board should be focused on promoting a stable transaction medium, one that fosters purchasing power parity (PPP). The PPP precept would permit the purchase of a similar commodity over time and across geographical boundaries with a given unit of exchange.

The Recommendation:

Establish and maintain a strong and stable transaction medium that cannot be readily replicated (i.e., manipulated) by electronic and/or physical means.

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There you go again. The 40th President of the United States, Ronald Reagan, uttered those words 27 years ago while debating former Vice President Walter Mondale during the 1984 presidential debates.Four years prior, he did the same versus his 1980 opponent, President...
Friday, 04 November 2011 08:12 AM
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