Appropriate monetary policy and forecast disagreement at the FOMC

Abstract

Research Question The Federal Open Market Committee (FOMC) of the Federal Reserve System is responsible for the conduct of monetary policy to, put simple, keep prices stable and employment high. Yet, members of the FOMC are not only in charge of setting interest rates but also of making forecasts for key macroeconomic variables, in particular for the future developments in the inflation rate and the unemployment rate. The present study aims to investigate how dissenting views on appropriate monetary policy translate into disagreement on macroeconomic forecasts. Contribution Disagreement in monetary policy committees is a well-studied phenomenon. This study builds on results from the literature, yet makes important additions. Over a sample period of fourteen years, the committee members' individual forecasts for future rates of inflation and unemployment are matched with their individual interest rates. In both forecast and interest rate data, disagreement is measured such that the direction of disagreement receives particular attention. Using panel methods, it is analyzed whether the direction in which minority voters deviate from the majority's view on interest rates translates into the direction of the disagreement about the macroeconomic outlook. In addition it is studied how committee members revise their individual macroeconomic outlook between two consecutive forecasting rounds. Results Estimation results imply that monetary policy makers that want higher interest rates forecast higher inflation and lower unemployment rates. The individual forecast revision behavior displays a similar pattern. The results can be interpreted such that monetary policy makers that opt for a tightening in monetary policy forecast economic developments that would emerge if the tightening would not be undertaken. Different from similar studies in this field, the current results yield evidence that monetary policy makers do rather not exaggerate their forecasts to signal their view on appropriate monetary policy. Nichttechnische Zusammenfassung Fragestellung Der Offenmarktausschuss (engl. Federal Open Market Committee, kurz: FOMC) des amerikanischen Notenbanksystems (engl. Federal Reserve System) verfolgt mit seinen geldpolitischen Entscheidungen, vereinfacht dargestellt, zwei Ziele: Preisstabilität und einen höchstmöglichen Beschäftigungsstand. Die Mitglieder des FOMC sind neben der Zinssetzung auch mit Vorhersagen über die zukünftige Entwicklung dieser wirtschaftlichen Zielgrößen betraut. Die vorliegende Studie versucht, das regelmäßige Auseinanderweichen von und mögliche ¨U bertreibungen bei individuellen Vorhersagen durch unterschiedliche Auffassungen über die Angemessenheit der Geldpolitik zu erklären. Beitrag Uneinigkeit in geldpolitischen Kommittees wie etwa dem FOMC ist ein gut erforschtes Phänomen. Die vorliegende Arbeit fußt auf Ergebnissen aus der Literatur, ergänzt aber wesentliche Bausteine. ¨U ber einen Zeitraum von vierzehn Jahren werden den individuell vorhergesagten Werten für die Inflationsrate und die Arbeitslos...

Central bank forecasting: A survey

“…This work on the forecast heterogeneity of monetary policy committee member is related to a broader literature about monetary policy disagreement based on political affiliation (Bordo & Istrefi, 2018), career backgrounds (Eichler & Lahner, 2014), and regional conditions (Coibion & Goldstein, 2012; Jung & Latsos, 2015; Meade & Sheets, 2005). Policy preferences and forecast disagreement interact in important ways; for example, hawkishness is associated with higher‐than‐consensus inflation forecasts (Bennani et al., 2018; Eichler & Lahner, 2014; McCracken, 2010; Schultefrankenfeld, 2020). Moreover, non‐voting FOMC members may have strategic motives in forecasting, as they systematically overpredict inflation relative to the consensus if they prefer tighter monetary policy (Tillmann, 2011) and “anti‐herd” their inflation forecasts (Rülke & Tillmann, 2011).…”