Fed Forecasting Errors
By Arnold Kling
A disparaging but not unfair comparison would be to little orphan Annie. “The sun’ll come out tomorrow,” Annie sang. “Bet your bottom dollar that tomorrow there’ll be sun.” The 3-to-4 percent recovery growth we’ve been long promising will come out tomorrow, the FOMC basically says every quarterly meeting. Bet your bottom dollar that tomorrow there’ll be lower unemployment.
Pointer from Phil Izzo. Let me make two comments.
1. The Fed forecasting team, which includes at least three dozen Ph.D economists, just got pwned by a high school student!
2. I have remarked before that one hypothesis to explain the 1970s inflation is that the Fed consistently underpredicted inflation and consequently over-estimated the amount of monetary ease that was appropriate. A similar hypothesis for a Sumnerian today would be that the high unemployment since 2008 is a result of the Fed consistently over-predicting aggregate demand* and consequently under-estimating the amount of monetary ease that is appropriate.
*No, I don’t personally like the aggregate demand concept. But there is some non-zero probability that I am wrong and that Scott Sumner and the rest of the economics profession that relies on AD are correct.