A directional analysis of Federal Reserve predictions of growth in unit labor costs and productivity

Abstract

Existing evidence suggests that the Federal Reserve forecasts of inflation imply asymmetric loss, as the Fed has significantly over‐predicted inflation for the post‐Volcker period. Consistent with such evidence, we show that the Federal Reserve forecasts of growth in both unit labor costs and productivity, while directionally accurate for 1983–2003, imply asymmetric loss. That is, the forecasts of growth in unit labor costs are more (less) accurate in predicting the upward (downward) moves. The forecasts of growth in productivity, however, are less (more) accurate in predicting the upward (downward) moves. The interpretation of our findings may be that, in achieving long‐term price stability, the Fed is cautious not to incorrectly predict the upward (downward) moves in growth in unit labor costs (productivity).FOMC, Greenbook, inflation, directional accuracy, asymmetric loss, J01, E52, E37,

Is the Purchasing Managers’ Index Useful for Assessing the Economy’s Strength? A Directional Analysis

“…3 See, for instance, Ash et al (1998), Ashiya (2006), Artis (1996), Baghestani (2011), Greer (2003), Joutz and Stekler (2000), Leitch and Tanner (1995), Pons (2000), and Sinclair et al (2010). directional accuracy of forecasts by corporate managers whereas Easaw and Heravi (2004) and Easaw et al (2005) examine the directional accuracy of consumer sentiment indexes in the UK and US and find that they are useful predictors of household consumption growth.…”