Can the Fed Predict the State of the Economy?

13 Pages Posted: 9 Dec 2009 Last revised: 14 Mar 2010

See all articles by Tara M. Sinclair

Tara M. Sinclair

George Washington University - Department of Economics; George Washington University - Elliott School of International Affairs (ESIA); George Washington University - Institute For International Economic Policy (GWIIEP); George Washington University - Research Program on Forecasting; George Washington University - George Washington Institute of Public Policy (GWIPP); Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA); Halle Institute for Economic Research

Frederick Joutz

George Washington University

H.O. Stekler

George Washington University - Department of Economics

Date Written: March 2, 2010

Abstract

Recent research has documented that the Federal Reserve produces systematic errors in forecasting inflation, real GDP growth, and the unemployment rate, even though these forecasts are unbiased. We show that these systematic errors reveal that the Fed is “surprised” by real and inflationary cycles. Using a modified Mincer-Zarnowitz regression, we show that the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead. We further show that even allowing for an asymmetric loss function the Fed does not appear to know the state of the economy one quarter ahead.

Keywords: Forecast Evaluation, Federal Reserve, Systematic Errors, Recessions

JEL Classification: C53, E37, E52, E58

Suggested Citation

Sinclair, Tara M. and Joutz, Frederick and Stekler, H.O., Can the Fed Predict the State of the Economy? (March 2, 2010). Available at SSRN: https://ssrn.com/abstract=1518408 or http://dx.doi.org/10.2139/ssrn.1518408

Tara M. Sinclair (Contact Author)

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George Washington University - Elliott School of International Affairs (ESIA) ( email )

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HOME PAGE: http://home.gwu.edu/~tsinc/

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George Washington University - Research Program on Forecasting ( email )

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Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
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Halle Institute for Economic Research ( email )

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Frederick Joutz

George Washington University ( email )

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H.O. Stekler

George Washington University - Department of Economics ( email )

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