The FOMC, blue chip or the new framework: Predicting the Fed Funds rate
This installment presents a new framework to predict the level of the fed funds rate two quarters out.We compare our framework’s fed funds forecast with the FOMC and Blue Chip forecasts to decide who is more accurate at predicting the near-term fed funds rate.The framework effectively predicted the turning points in the fed funds rate in the simulation analysis.The FOMC started providing the SEP in 2012; therefore, we employ the 2012-2024 period to identify whose fed funds rate predictions are the most accurate.
Blue Chip has a higher perfect forecast accuracy rate (67%) than the FOMC (58%).The FOMC’s average forecast error is slightly lower (21 bps) than the Blue Chip consensus average error (29 bps).Both the FOMC's SEP and the Blue Chip consensus missed the 2019 rate cuts.With the September rate cut in the books and high expectations of more rate cuts in the remaining meetings of 2024, both the FOMC and the Blue Chip forecasts suffer a lower average forecast accuracy and a higher average forecast error.
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