Posts filed under “UnGuru”
Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting
Richard Crump, Stefano Eusepi, and Emanuel Moench
Following the June 18-19 Federal Open Market Committee (FOMC) meeting different measures of short-term interest rates increased notably. In the chart below, we plot two such measures: the two-year Treasury yield and the one-year overnight indexed swap (OIS) forward rate, one year in the future. The vertical line indicates the final day of the June FOMC meeting. To what extent did this rise in rates following the June FOMC meeting reflect a shift in the expected future path of the federal funds rate (FFR)? Market participants and policy makers often directly read the expected path from financial market data such as the OIS contracts. In this post, we take an alternative approach by looking at surveys of professional forecasters to assess how expectations changed.
The advantage of market-based measures is that, unlike survey data, they are available at very high frequencies. However, changes in market-based measures of expectations may be obfuscated by significant changes in investors’ risk assessment—changes in so-called term premia (see this Liberty Street Economics blog post for more information on term premia). For example, the OIS is an agreement where one party pays a specified fixed interest rate payment in return for a floating interest rate payment based on the FFR. Movements in the OIS rate thus reflect changes in market participants’ expectations of the future evolution of the FFR as well as the compensation they require for bearing the risk that actual outcomes may be different from what they expect.
In the chart below we present two scenarios. The panel on the top gives the expected path of the FFR from the June Blue Chip Financial Forecasts (BCFF) survey (conducted on May 22-23) and the panel below gives the path from the July survey (conducted a few days after the June FOMC meeting, on June 24-25). The BCFF survey is a survey of forecasts on economic and financial indicators taken over a wide range of institutions (for more details, see here). The solid blue line in each panel shows the median forecast for the horizons available in each survey (the July survey extended the horizon to the fourth quarter of 2014). Encasing the median forecast are the 25th and 75th percentile forecasts displayed as dotted black lines. None of these three series shows any meaningful changes after the June FOMC meeting. Solid red lines indicate the market-implied FFR path from OIS contracts observed on the same days as the surveys were conducted. While survey and financial market measures were basically aligned before the FOMC meeting, the market-implied path shoots up in late June. For comparison, the majority of professional forecasters in the July survey do not expect the FFR to be above the range of 0 to 0.25 percent through the end of 2014. In contrast, the path of the red solid line is roughly consistent with the FFR leaving this range in mid-2014.
These findings may be only suggestive given the length of time between the June and July BCFF surveys. We deal with this drawback in two ways. First, we have included as dash-dotted purple lines the market-implied path right before and after the June FOMC meeting. The market-implied path right before the meeting is very similar to the average path observed on the June survey dates. The market-implied path right after the meeting shows that most of the adjustment to OIS rates occurred soon after the FOMC meeting. Second, we use information from the Blue Chip Economic Indicators (BCEI) survey. The June BCEI survey conducted on June 5-6 has twenty-eight participants in common with the July BCFF survey (approximately half of the respondents in each survey). This exercise allows us to evaluate changes in survey forecasts in a narrower window around the June FOMC meeting (see this blog post for an example of this approach for the August 2011 FOMC meeting). We use forecasts of the three-month Treasury bill because the BCEI does not collect forecasts for the FFR. The three-month Treasury bill and the FFR typically move in lockstep.
The next chart shows two estimated distributions for the average level of the three-month Treasury bill for 2014. The blue and red solid lines display these estimated distributions across the twenty-eight forecasters in the surveys taken before and after the FOMC meeting, respectively. This plot shows that narrowing the window around the FOMC date does not alter the conclusions. There was almost no change between professional forecasts of short-term interest rates before and after the June FOMC meeting.
The main takeaway from our analysis is that professional forecasters did not interpret Fed communication around the FOMC meeting as signaling a change in the likely path for the FFR. Then how do we reconcile the fact that interest rates rose substantially, but professional forecasts showed little change? The most likely explanation is that the shift in interest rates was attributable to changes in term premia as investors shifted their risk assessment over this period. This interpretation is consistent with a comparative historical analysis of this period posted on this blog.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Richard Crump is a senior economist in the New York Fed’s Research and Statistics Group.
Stefano Eusepi is a research officer in the Group.
Emanuel Moench is a senior economist in the Group.
The following assortment of quotes comes from Paul Farrell 2007-2008 bank credit meltdown — the top nine happy-talking gurus False predictions made before the 2008 subprime credit meltdown: ‘Mad Money’ Jim Cramer: “Bye-bye bear market, say hello to the bull.” Ken Fisher: “This year will end in the plus column … so keep buying.”…Read More
One of the funny things about running an asset management shop is that you get to see how other firms assemble portfolios. They range from good to bad to terrible. If they were all that good, we probably are not seeing much of them, for those clients are happy to stay where they are. Hence,…Read More
10 reasons why economics is an art, not a science Barry Ritholtz Washington Post, August 9, 2013 “Why did God invent economists?” “To make weathermen feel good about themselves.” That’s a quip from David Rosenberg, former chief economist at Merrill Lynch who is now working at Gluskin Sheff, the wealth management…Read More
This morning, I get a tweeted at by a guy with over 100,000 twitter followers, but less than 10,000 Tweets. Which coincidentally leads me to today’s WOTD from From wordspy: socialbot n. An automated software program designed to mimic a real person on a social networking site. Also: social bot. Example Citations: Now come…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at what good economists are to investors. The print version had the full headline What this investor took away from summer camp with the economists while the online version was 10 reasons why economics is an art, not a science. It…Read More
Whatever Happened to the Economic Policy Uncertainty Index? Mike Konczal Aug 6, 2013 Jim Tankersley has been doing the Lord’s work by following up on questionable arguments people have made about our current economic weakness being something other than a demand crisis. First, he asked Alberto Alesina about how all that expansionary austerity…Read More
Lately, I have been spending an inordinate amount of time with economists.
This past month, I have been at several dinners (party of 8) with them, spent time in the woods of Maine chatting them up, listened to their debates on economic policy, even spent time in a canoe fishing with them. Propriety — and Chatham House Rules — prevents me from naming any of the wonks, but it includes Chief Economists at major Wall Street firms, government entities, professors, with a few Nobel laureates thrown in for good measure.
This has led me to an interesting chain of thought about economists in general, and the failure of economics the discipline specifically. Note that I find economists to be intelligent, engaging and often charming. My references here are not to the people who call themselves economists, but rather to their work product that we call “economics.”
Long time readers know this is an an area of interest to me for many years (see the list after the jump). Way back in 2009, I gave 10 reasons Why Economists Missed the Crises. All 10 of the reasons given remain in force today, and may even be stronger.
In the intervening years, I have reached a few conclusions. This is worthy of much deeper study and analysis than the short shrift given here, but until then, I have a few ideas I wanted to jot down. If you have any intelligent thoughts on this subject, be sure to share them in comments.
Based on my time spent with Economists, here are a few anecdotal observations:
Issues of Economists & Economics
1. Economics is a discipline, not a Science. Physics can send a satellite to orbit Jupiter, Economics cannot tell you what happened yesterday. This is an enormous distinction, and has led to a) the “Physics Envy,” and b) an unnecessary emphasis on mathematical complexity.
2. Models are of limited utility. People forget that (as George Box has noted) models are imperfect depictions of reality. If you become overly reliant on them, you encounter a minefield of problems. Several analysts have told me that if the Fed cannot model something, than to them, it does not exist. Think about the absurdity of that viewpoint — and its impact on policy.
3. Contextualizing data often leads to error. This is more complex than it appears. What I mean by this is that everything that economists consider has to be forced into their intellectual framework; since everything is viewed through the imperfect lens of Economic Theory, the output is similarly imperfect — sometimes fatally.
4. Narrative drives most of economics. This is the corollary to the context issue. Everything seems to be part of a story, and how that story is told often leads to critical error. Think about phrases like “stall speed”, “second half rebound”, “muddle through”, “Minsky moment”, “austerity”, “escape velocity”, etc. All of these lead to rich tales often filled with emotional resonance.
5. Economists are loathe to admit ‘They Don’t Know.’ This trait is common to many professions, but I suspect the modeling issue may be partly to blame. Whenever I see forecast written out to 2 decimal places, I cannot help but wonder if there is a misunderstanding of the limitations of the data, and an illusion of precision. To paraphrase, “Only the people who understand both the data and its limitations will not get lost in the illusion of precision.”
6. A tendency to confuse correlation with causation. This is one of the oldest statistical foibles known to mankind, and yet economics remains rife with it at the highest levels. Look no further than the Fed’s obsession with the Wealth Effect for a classic correlation error; I shudder when I think about what other arenas they are fundamentally lost in.
7. The Peril of Predictions. I cannot figure out why economists seem to be so wed to making predictions, given how utterly miserable they are at it. Items 1 and 5 might be a factor.
8. Sturgeon’s Law: Lastly, there is a wide dispersion of talent in Economics, and following Sturgeon’s Law, many of the rank & file are simply mediocre.
One last note: This is not, as Paul Krugman has referenced, a debate as to which subgroup of economists are right or wrong; rather, its a set of observations of the species as a whole.
Perhaps this post is mis-titled; Instead of Blame the Economists it should read Blame Economics.
How one discredited “mortgage expert” from the American Enterprise Institute launched an ongoing disinformation campaign to destroy a successful government program that helped stabilize the mortgage markets. ~~~ Much of the brouhaha concerning the fate of the Federal Housing Administration can be traced to the actions of one dishonest man, a crackpot who is treated with utmost deference by…Read More