One of the most curiously persistent surrealisms of Washington, DC is the reflexive deference given the Federal Reserve System. The Washington elite tends to accord more infallibility to the Fed than do Catholics the Pope.
Now comes one of the world’s top monetary reporters, Ylan Q. Mui, to make a delicate observation at the Washington Post’s Wonkblog, in Why nobody believes the Federal Reserve’s forecasts. Mui:
“The market recognizes that the Fed has repeatedly erred on the optimistic side,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Fool me 50 times, but not 51 times.”
Even the government’s official budget forecasters are dubious of the Fed’s own forecast.
This is a theme that Mui has touched on before. In 2013, she wrote Is the Fed’s crystal ball rose-colored?:
The big question is whether Fed officials can get it right after years in which they have regularly predicted a stronger economy than the one that materialized. In January 2011, Fed officials predicted that GDP would grow around 3.7 percent that year. It clocked in at 2 percent. In January 2012, they anticipated growth of about 2.5 percent. We ended up with 1.6 percent.
To give Ms. Mui’s competition its due, Dr. Richard Rahn at the Washington Times last April crisply noted:
The Federal Reserve had forecast the U.S. economy to grow about 4 percent near the beginning of each year for the last five years. But during each year, the Fed was forced to reduce its forecast until it got to the actual number of approximately 2 percent. (Other government agencies have been making equally bad forecasts.) These mammoth errors clearly show that the forecast models the official agencies use are mis-specified and contain incorrect assumptions.
What’s going on here?
A good bet would be that there’s a problem with the Fed’s reliance on an arcane art. This art is designated “Dynamic Stochastic General Equilibrium” modeling..."
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