Title: Reconsidering the Feds forecasting advantage
Authors: Amy Guisinger - Lafayette College (United States) [presenting]
Michael Owyang - Federal Reserve Bank of St Louis (United States)
Michael McCracken - Federal Reserve Bank of St. Louis (United States)
Abstract: Previous studies have found that the Federal Reserve's (Greenbook) forecasts of inflation are superior to that of professional forecasters. More recent papers, however, suggest that this advantage has been dissipating over time. We investigate the origin of the Fed's forecasting advantage, focusing on an explanation that was previously dismissed, that the Fed's forecasts are conditional on the path of policy, about which the Fed may have more information. To do this, we examine whether the Federal Reserve's advantage remains after controlling for information about future monetary policy. We find that the Feds forecasts no longer encompasses the private sectors once accounting for the future path of policy, regardless of the subsample used for estimation. We then consider whether the Fed's advantage remains when the market is operating under the same (or similar) beliefs as the Fed. We identify dates when the markets expectation of future policy coincided with the Greenbooks conditioning path and find the Fed seems to possess no informational advantage during periods where the markets expectations of future policy are synched to the Feds.