Fed gets its forecasts wrong - dangerous to follow

The Fed gets their forecasts wrong. If investor followed Fed forecasts, they would have thought the Great Recession would have been less severe and would have thought the recovery would have been much stronger. The Fed just does not do a good job of making predictions. Their central forecast tendencies given all of their resources and staff are dangerous for use in decision-making.

The poor forecasting was nicely summarized in a San Francisco Fed Economic Letter, "Persistent Overoptimism about Economic Growth". The Fed has been tracking their central tendencies with their Summary of Economic Projections (SEP) since November 2007. The review of the SEP projections tells us that there is too much optimism in forecasts. This is consistent each year that the SEP was tracked as seen in the figures below.

So what do they attribute this over-optimism? The researchers argue that the forecasts are closely tied to the past growth. Given all of their expertise, the researchers say that the SEP is a just a trend from the past. This seems to be an odd explanation given the models used by the Fed. It does tell us that the idea that forecasters have unbiased rational expectations is flawed. These forecasts also do not tell us anything about the link between economic growth and asset prices. We cannot get the forecast right and we are not very good about measuring the link between the real and financial economy.

In the global macro space, there should be less time focused on trying to forecast the future and more time just determining where you are in the economic cycle. You cannot know where you are going until you know where you are standing.