The Calculus of Dissent: Bias and Diversity in FOMC Projections

Abstract

Economic projections by the Federal Open Market Committee (FOMC) were highly inaccurate in the years during and after the Great Recession. Using a model of collective prediction that weighs the ``wisdom of crowds'' against shared biases, we analyze GDP forecast errors in a panel dataset of FOMC projections from 1992 through 2016. Consistent with the model, we find that diversity of projections reduces collective error while shared bias increases collective error. Collective error is strongly associated with errors by the Federal Reserve Board staff. The benefits of diversity are often statistically significant, especially for projections with terms longer than one year.

Keywords: Federal Reserve, Forecasting, Committee decisions, Wisdom of crowds

JEL Classification: D71, D73, E37, E47, E58