Daily Academic Alpha: Fed Forecasts–Folly or Fact?

/Daily Academic Alpha: Fed Forecasts–Folly or Fact?

Daily Academic Alpha: Fed Forecasts–Folly or Fact?

By | 2017-08-18T17:07:36+00:00 August 31st, 2015|Macroeconomics Research|Comments Off on Daily Academic Alpha: Fed Forecasts–Folly or Fact?
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(Last Updated On: August 18, 2017)

Macroeconomic forecasting is incredibly difficult. The results from this paper suggest that the brainpower of the Fed’s 100 person economics team can predict 3 to 6 months out with a reasonable degree of success, but beyond that time horizon (e.g., 1-year), basic forecasting models perform just as well as the human experts. (see figure below).

The Accuracy of Forecasts Prepared for the Federal Open Market Committee

We analyze forecasts of consumption, nonresidential investment, residential investment, government spending, exports, imports, inventories, gross domestic product, inflation, and unemployment prepared by the staff of the Board of Governors of the Federal Reserve System for meetings of the Federal Open Market Committee from 1997 to 2008, called the Greenbooks…We find that Greenbook forecasts significantly outperform our benchmark forecasts for horizons less than one quarter ahead. However, by the one-year forecast horizon, typically at least one of our forecasting benchmarks performs as well as Greenbook forecasts

Here is a key chart from the paper:

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.


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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.