{"id":6670644,"date":"2017-07-25T09:11:25","date_gmt":"2017-07-25T09:11:25","guid":{"rendered":"http:\/\/cfe.econ.jhu.edu\/?p=6670644"},"modified":"2024-01-24T12:26:30","modified_gmt":"2024-01-24T17:26:30","slug":"mid-summer-review-mr-phillips-mr-trump-shooting-blanks","status":"publish","type":"post","link":"https:\/\/krieger.jhu.edu\/financial-economics\/2017\/07\/25\/mid-summer-review-mr-phillips-mr-trump-shooting-blanks\/","title":{"rendered":"Mid-Summer Review: Mr. Phillips and Mr. Trump both Shooting Blanks"},"content":{"rendered":"\n
There are two parts to forecasting monetary policy: forecasting what picture the economy will present to the Fed, and forming a judgment about how the Fed will react to that picture. The first of these is pure<\/em> forecasting\u2014what will happen tomorrow? Given a macro forecast, the second mainly requires a view about the Fed\u2019s ongoing decision framework. Insert your forecast into the decision framework and out pops a judgment about the likely course of policy.<\/p>\n\n\n\n The pure forecasting step is where the real action has been of late: the FOMC\u2019s consensus has very steadily followed a simple decision framework for several years now. Thus, your view of where policy is going shouldn\u2019t depend much on puzzling about the Fed and should focus almost exclusively on the economy. We\u2019ve taken to quoting James Carville: It\u2019s the economy, stupid.<\/p>\n\n\n\n At mid-Summer in what has been a novel year, it is probably worthwhile to do a deeper dive into economic forecasting.<\/p>\n\n\n\n Forecasting<\/strong><\/p>\n\n\n\n Most analysts put great effort into forecasting, carefully analyzing myriad indicators of whether the economy is heating up or cooling off. Together, your present authors have over 50 year\u2019s of humbling experience forecasting on Wall Street and analyzing forecasts at the Fed, and we separately came to the same conclusion: the resources poured into near-term forecasting seldom improve and often degrade forecast accuracy.<\/p>\n\n\n\n Don\u2019t get us wrong, forecasting is a very important endeavor. Eisenhower famously said that in battle, plans are useless, but planning is everything. Similarly, we have found that forecasting is a vital umbrella activity for performing due diligence regarding myriad details in the economy. You start with a sense of ongoing trajectories, digest a wide variety of current developments and consider whether to tweak or even sharply revise your sense of the most likely snapshot going forward. It takes great discipline, however, after expending great effort in this due diligence, to remind yourself that most of the time you have been sifting through noise and that there is essentially no signal. Most forecasters yield to temptation and nudge their forecasts this way and that in response to fleeting changes in short-term indicators. Much evidence supports the conclusion that these nudges are, for the most part, counterproductive.[1]<\/sup><\/a><\/a><\/p>\n\n\n\n Thoughtful institutions, including the Fed in our experience, appraise short-term indicators the way good doctors look at myriad health metrics in an annual checkup: study the numbers carefully because every now and then, you find something that is best caught early.<\/p>\n\n\n\n For example, certain big jolts to the economy elicit predictable responses. Dramatic moves in the exchange value of the dollar have predictable ongoing effects on net exports. A sharp rise in oil prices generally portends higher headline and core inflation. Production quickly bounces back from major disruptions due, say, to hurricanes or dock strikes. Large fiscal stimulus, in the short run, tends to lift output, interest rates, the value of the dollar, imports and the trade deficit. In short, some large events warrant tweaking your forecast.<\/p>\n\n\n\n Illustration: 2012\u20142016<\/strong><\/p>\n\n\n\n You can see an illustration of our forecasting perspective and of the history of the monetary policy debate in Fig. 1. Up through about 2012, both 12-month job gains as we understand them in today\u2019s revised data and the real-time measure of 3-month gains provide plenty of reason for concern. But starting in 2012, the story changed. In particular, twelve-month job gains have been very steady and consistently at or above 180,000 per month.<\/p>\n\n\n\n