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The Alternative Answer Daily

Is the Fed Projecting or Pretending on Rates?

Let’s go back to some Fed “projection” analysis we did on August 19th

Tomorrow we will get some new Fed projections. Suddenly people care. Below is the work we did back on August 19th.

Fed Projections – Goal Seeked or Better Informed?

It is worth taking a closer look at some of the Fed projections. To be honest, my starting assumption is that the projections from the Federal Reserve itself are of about average quality. Who doesn’t have sophisticated macro models at this stage? Every decent sized bank, every broker/dealer, every hedge fund, every big insurance company, every big pension fund, media outlets, independent researchers, etc. There are lots of decent models out there and some probably have more resources than the Fed, and some are definitely even more incentivized to be right.

I do believe than the Fed has a little more information available to it than the private sector, but that only helps in projecting out the next month or two. The longer you go out, the more it is just guesswork, or a goal-seeked answer.


So let’s start with the Real GDP projections from June 2012 and June 2013. The first thing that I find “interesting” is why they see growth accelerating so much and then dropping off?

From 2.0% to 2.5% to 3.25% to 2.4%. What makes them believe that 2014 and even 2015 will be so good? Or, the corollary of that, is what makes them believe the “longer” term is so much lower?

I am sure they have their reasons but if this set of projections was coming from a 1st-year MBA student or 2nd-year economist, we would probably dismiss the results out of hand. It looks the projections are there to spin a story. That things are getting better and about to get really good, and in the interests of the country I will lie about that, but I can’t go on record saying the real long term average is that good.

Then there is the question of the accuracy.


When the Fed was making its 2012 projection they already knew that the 1st half of the year had averaged 2.45% but shown a steep decline. So it looks like they all assumed that it would rebound a bit from Q2 but not do great. We got to a full year average of 1.95% for 2012. So they had 6 months of information, were sitting on information not available to the public, and in a wide range of 1.9% to 2.4% barely got it right? Hardly seems impressive. Though I will admit that the U.S. Real GDP Annual YOY % came in at 2.8%. A bigger gain than simple averages, but an even worse miss by the Fed.

The volatility of GDP in 2012 didn’t help either. Q3 looked great only to be followed by a disastrous Q4.

Now we are halfway through 2013. We have averaged 1.45% through two quarters. The Fed which expected 2.5% last year when they made their predictions now expect only 2.45%. That seems a bit aggressive given the start of the year, but they do have the advantage that we have changed how we calculate GDP (to include some R