Forecasting Error Puts Fed On Wrong Side Again

2025-02-07 06:45:00 ET

Summary

• The Federal Reserve’s record of forecasting has frequently led it to respond too late to changes in economic and financial conditions.
• Given that economic growth is a function of economic production and consumption, the inability to expand economic prosperity suggests the Fed’s current forecasts are likely once again overstated.
• Given that employment is the lynchpin of economic growth, the Fed’s current assessment of the labor market’s strength is a significant risk in its forecasting accuracy.

The Federal Reserve's record of forecasting has frequently led it to respond too late to changes in economic and financial conditions. In the most recent FOMC meeting, the Federal Reserve changed its statement to support a pause in the current interest rate-cutting cycle. As noted by Forbes:

"The policy-setting Federal Open Market Committee agreed unanimously to hold the target federal funds rate at 4.25% to 4.5%, the U.S. central bank announced Wednesday afternoon following the conclusion of the FOMC's two-day meeting. The pause breaks a three-meeting streak of cuts dating back to September, when the Fed rolled out its first rate cut since March 2020.

The FOMC announcement noted unemployment "has stabilized at a low level" and "inflation remains somewhat elevated," notably removing a reference from its prior rates decision of inflation making "progress" toward the 2% target."

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