Monday, July 29, 2013

A comment on Fed Forecasting Records

by Bill McBride on 7/29/2013 02:41:00 PM

Jon Hilsenrath and Kristina Peterson write about a "WSJ analysis of more than 700 economic predictions between 2009 and 2012 by Fed policymakers shows ... Janet Yellen ... the most prescient": Federal Reserve 'Doves' Beat 'Hawks' in Economic Prognosticating

As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy's prospects.

"I expect the pace of the recovery will be frustratingly slow," she said in a San Francisco speech. A month later, addressing fears that money flooding into the economy from the Federal Reserve would stoke inflation, Ms. Yellen said not to worry in a speech to Idaho bankers: High unemployment and the weak economy would tamp wages and prices.

Others at the Fed spoke forcefully in the other direction. Unless the central bank reversed the easy money course, Philadelphia Fed President Charles Plosser warned in December 2009, "the inflation rate is likely to rise to levels that most would consider unacceptable."

Ms. Yellen was proved right.
A few comments:

1) The title of the article is about 'Doves' beating 'Hawks'. A good Fed Chair would be hawkish (raise rates) or dovish (lower rates) at the correct times. Over the period in question, 'dove' was synonymous with 'correct'. But no one should think Yellen is a perma-dove. As Professor Hamilton noted this weekend (He knows Yellen), she will certainly change her mind as circumstances change.

2)  It is important to remember that Yellen was ahead of most other Fed presidents in the period between 2005 and 2008 (before this WSJ analysis).  In 2005 Yellen was expressing concerns about housing, "analyses do indicate that house prices are abnormally high—that there is a "bubble" element, even accounting for factors that would support high house prices", and 'ghost towns' of the West in 2006. In 2007 she gave a speech correctly identifying some of the spillover effects from subprime.

3) This doesn't mean Yellen has a "crystal ball".  She doesn't.  Instead this means she has a strong understanding of macroeconomics and paid close attention to the data. A key for any successful manager is to be able to use a wide-angle lens (see the big picture) and also to be able to zoom in on the details (data driven) when necessary. Yellen's track record suggests to me that she excels at both.

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