FOMC Inflation Test Coming

If Supply Issues Persist, Will the FOMC Keep Hiking?

In January Goldman Sachs projected that the FOMC would increase the federal funds rate at every other meeting (each meeting is 6 weeks apart) starting with the March meeting. By February the major investment firms were leapfrogging over each other to guess how many increases there would be in 2022. Bank of America won that race by forecasting 7 increases. The new game is guessing the terminal level for the funds rate in the current hiking regime. The average guess for 2023 almost reached 4.0% before dipping to 3.75% last week. This is a silly game since there are so many variables that can’t be known that will determine the choices the FOMC makes in the next 12 months.

Another factor should humble those who participate in the terminate rate guessing game. The FOMC’s track record in forecasting the federal funds rate, Core inflation, Unemployment Rate, and Real GDP is awful, according to David Rosenberg. Forecast misses for the economic data is somewhat understandable, since they are out of the FOMC’s control. But only being 37% right about the funds rate, which the FOMC determines, is scary. This also should undermine the widespread view that the FOMC has better information than other economists and the brain power to formulate policy.

Since January the forecast pendulum has swung from the FOMC increasing the funds rate by 1.0% in 2022 to more than 3% by the end of this year. The rush to guess how high the FOMC will lift the funds rate overlooks the goals that the FOMC has clearly stated. I reviewed those goals in the May 16 Weekly Technical Review. “The FOMC has been specific about its goals, so monitoring the progress toward meeting those goals should provide some insight as to how policy may evolve in coming months.