This month’s FOMC is likely to produce little visible action but there is a lot going on under the surface. The meeting starts tomorrow, Tuesday, October 23, and should conclude with a policy statement around 12.30 ET on Wednesday, the 24th.
What to expect?
Not much new. QE3 has just begun, Operation Twist 2 is ongoing, and for reasons discussed below, it is probably (although not definitely) too early for communication changes.
The FOMC may want to make slight updates to its statement noting some mildly positive economic data. It might strike a more positive tone on housing, but given that QE3 is tied to the labour market, any change to “growth in employment has been slow” is likely to be cosmetic.
The FOMC is set to discuss consensus committee forecasts on day one. This is not as sexy as QE – it won’t move the markets – but is profoundly important to the future of the Fed. It will affect policy down the line. Read more
Today’s announcement that the FOMC will publish interest rate forecasts from its January meeting is a small surprise. It seemed unlikely there would be time to settle anything at the December meeting; on the other hand, the minutes before a two-day meeting were always a likely time to announce such a move, because it give markets time to prepare for what they’re getting in a few weeks time.
The December minutes are full of clues on the trade-offs that the Fed made in its decision.
(1) The FOMC decided on publishing the existing forecasts of “appropriate” monetary policy made by each committee member. This is not as simple as it seems and was clearly the subject of some debate. Read more
Professional forecasters have become more optimistic in the Q1 survey by the Philly Fed but I’m not bowled over by their wild enthusiasm.
As any reader of this blog knows, I have campaigned for years for the Bank of England to improve the transparency of its forecasts. Small and welcome improvements have been made, but the Bank’s inflation report still fails to describe the Bank’s forecasts adequately in a way that fosters a focus on the risks to inflation and growth.
The Bank says it is concerned to avoid a narrow focus on central forecasts. It lost that battle years ago, precisely because it kept the details of its forecast secret for a week after publication. Every intermediary has a reasonable urge to find out what the forecast is before being able to focus on the risks.
Because I like to be helpful, here are some graphs the Bank could produce that would be informative, based on probabilities alone and allow a focus on risks. They come from the statement in the latest Inflation report that, “the Committee judges that at both the two and three-year points there is only a one-in-four chance that inflation will be within 0.5 percentage points of the 2% target. The question is how to represent this fact graphically. Read more
At the next FOMC meeting on Sept 21st the committee will have to update its economic forecasts.
I have commented before on how bad the Bank of England’s fan charts are as a tool for communicating its forecast at the quarterly inflation report. The Bank half accepts these criticisms and has made some small but very welcome steps towards improving the presentation and communication of its forecasts.
Today, in the last post before I go on holiday, I want to spend some time looking at a more fundamental issue for next week’s inflation report: the forecasts themselves. We will have another go at this in the Financial Times next week and comments in advance are really welcome, but here are some very interesting preliminary results. Quick summary – the Bank’s forecasts are not very good. In fact they are shocking. And this matters because the Bank tells us that the forecasts form the basis for UK monetary policy.
Every August, the Bank does its own evaluation of its forecasting record and always pats itself on the back. This tiresome tradition arises since the Bank gives the forecasts extremely easy tests to pass. It compares its central forecasts with its own subjective range of uncertainty. Here are some other very basic tests of forecast accuracy, which do not give such an encouraging result to the Bank’s vast teams of economists and forecasters.
Persistent optimistic bias
If you look at the chart, the Bank’s central forecast for growth (mode market rate) is, on average, too pessimistic by 0.2 percentage points in the quarter it is forecasting and it gets more erroneously optimistic as the Monetary Policy Committee peers further into the distance. Read more
The annual revisions to national income data, just published, show the economy was worse than thought over the past 3 years, primarily because the economy was slowing earlier in 2007 and 2008 than previous data showed. In total as the chart shows, the level of national income is about 0.4 per cent lower now than we thought.
The peak of gross domestic product was lower by 0.3 per cent even if the recession was no deeper than we thought – the economy did not grow as much before the recession struck but still plunged as far as we thought.
The main driver of the downward revision is lower household expenditure. People bought far fewer fridges and other white goods than the statisticians previously thought. The consequence of Read more
An hour or so ago, Mervyn King recognised that the Bank of England’s communication of its forecasts could be improved. This is a big step forward for transparency and the Bank of England governor deserves to be heartily congratulated.
He had been digging himself deeper into a hole defending the existing fan charts, but in a lecture to the Royal Society today, he stopped digging. This shows courage and intellectual honesty that is rare among the heads of powerful institutions such as central banks.
As readers of this blog will know, I have been extremely critical of the Bank’s fan charts, particularly the published forecast in February which failed to convey the message the MPC wanted, and critical of the governor for refusing to acknowledge their weaknesses. I suggested alternative presentations, to meet both my needs as someone in the business of wholesale information dissemination and to meet the Bank’s needs of conveying uncertainty in its forecasting. The Bank is thinking along the same lines as I suggested.
Let’s look at what is being proposed. Read more