Measuring the Accuracy of Federal Reserve Forecasts

Abstract

Markets across the world pay enormous attention to every economic forecast made by Federal Reserve governors, particularly those from the chair. This article develops a new way that the academic literature can assess the accuracy of these Federal Reserve forecasts. In particular, our proposed method allows for both general and specific predictions to be assessed, while also accounting for the macroeconomic volatility that prevails at the time of the forecast. To develop this measure, we expand upon a methodology proposed by the Wall Street Journal to score the accuracy of forecasts made by the Fed. Our results show that Alan Greenspan was consistently the most accurate forecaster among Fed governors, while the most recent chair in our sample, Janet Yellen, has performed relatively poorly. More generally, we find that the chairs have become less accurate over time with their forecasts and have also tended to make fewer specific predictions.