The St Louis Fed today published a fascinating paper on how FOMC members’ motives may play a role in their inflation forecasting.
The paper found, strangely, that by removing FOMC members’ three highest and lowest inflation predictions, the midpoint of the range of price estimates was more accurate than the midpoint of all FOMC members predictions.
It’s not obvious why this would be the case. A reasonable assumption could be that the more smart people forecasting inflation, the more likely the midpoint off all the estimates would be. And, indeed, the paper found that that was the case with unemployment and GDP.
The paper suggests that the policy goals of the FOMC members may be the reason that the more comprehensive forecast is less accurate. “Insofar as FOMC members believe that their preferred policies should be implemented, and they want to persuade other FOMC members of their views, they may have an incentive to ‘forecast’ dire consequences if that policy is not enacted. For example, an inflation hawk has an incentive to forecast very high inflation regardless of whether that outcome is the most likely, and an inflation dove has a similar set of incentives to forecast lower inflation.”
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