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The Fed Economic Forecast is the Big Miss of the Year

Fed's Reverse Repo
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EDITOR NOTE: We might have been more than a little concerned when the Fed proposed changing its inflation target from 2% to an “average” of 2%. The latter implies an inflationary overshoot in considering the economic forecast for a relatively short period of time--so goes the Fed’s theory. When the Fed announced this strategic change in 2019, we knew that the central bank was aggressively aiming for higher inflation and that an overshoot of the 2% target would have to be endured before the bank attempts to catch the runaway tiger by the tail, figuratively speaking. What does concern us, and everyone else, for that matter, is Powell’s admission that the Fed was shocked at the rate of the inflationary surge. This is what the bank was aiming for, and to think that they were shocked because the timing wasn’t perfect, or perfectly controlled, gives us a lot to worry about. Did the Fed really think that the economy was just like a machine--that a certain input will result in a specific output? Many central bank governors thought the same in decades past. Most of the outcomes led to disaster--and all led to the gradual -96.4% drop in the value of the dollar.

If you bet on the central bank’s price forecasts, you lost.

The Federal Reserve employs hundreds of economists whose job is assessing the American economy. So it is remarkable that the Fed is so wrong so often in its economic forecasts. The latest big miss has been its failure to anticipate this year’s surge in consumer prices.

Fed Chairman Jerome Powell conceded at his press conference Wednesday that prices had caught the central bank by surprise, but he showed no particular concern. The Federal Open Market Committee’s statement Wednesday after its two-day meeting also showed little interest in reeling in what has been the most reckless monetary policy since Arthur Burns roamed the Eccles Building. History hasn’t been kind to Burns.

Let’s compare actual inflation with the Fed’s forecasts. The nearby chart shows the estimates of inflation by Fed officials for 2021 and price increases this year. Fed governors and regional bank presidents offer their economic estimates of growth, unemployment, inflation and interest rates each quarter. The chart shows the median estimate of the Fed forecasters from June 2020 to last month for the personal consumption expenditures (PCE) deflator, the Fed’s favorite price index.

Note that through December 2020 Fed officials assumed PCE inflation this year of 1.8%. By March they had bumped that up to 2.4% as price pressures were already being felt. In June the median had climbed to 3.4%.

Yet even that catch-up drill underestimated the price surge. The PCE index had already climbed 3.6% in April from a year ago and 3.9% in May; the June figure will be out Friday.

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