Why the Fed’s Published Inflation Forecasts Are Meaningless—Or Worse

In a July 9 Washington Post op-ed, I (Benn) argued in favor of new Fed chair Kevin Warsh’s move to dispense with forward guidance. The argument was based on decades of evidence that Federal Open Market Committee inflation forecasts are highly inaccurate—systematically more so than the private sector’s—and that forecasts of future rate decisions incentivize members to validate them through actual rate votes, even when more recent data have discredited them.

In this post, we show that FOMC inflation projections are not only typically wide of the mark but virtually devoid of predictive content when extended out beyond one year.

As shown in the graphic above, the median two- and three-year FOMC inflation projections are invariably almost exactly 2 percent. Since 2 percent is the Fed’s stated longer-run inflation target, the projections are less an estimate of where inflation is likely to be than a declaration of where policymakers wish to take it.

At best, then, the two- and three-year inflation projections tell the public little beyond the fact that Fed officials remain committed to the 2 percent target. At worst, by presenting an aspiration as a forecast, they obscure the uncertainty surrounding inflation—and how policymakers might actually respond when price stability conflicts with the Fed’s other mandate of maximum employment.