The Forecasts of Individual FOMC Members: New Evidence after Ten Years

A central tenet of Macroeconomics is that monetary policy is forward looking. But Romer (2010) uses the forecasts of the participants of the U.S. Federal Open Market Committee’s (FOMC) and shows a remarkable heterogeneity in these participants’ outlooks. What accounts for this forecast heterogeneity? And how can one reconcile the tension between the need for a single monetary and the heterogeneity of forecasts that are steering it? To study these two questions, we continue the line of work initiated by Romer (2010). We study two sources of heterogeneity: Institutional and Dynamic. Institutional Heterogeneity is about differences in participants’ education, voting status, and regional affiliation — and the associated implications for forecast rationality. Dynamic Heterogeneity is about herd behavior, extreme forecasts, temporal aggregation, and macroeconomic shocks. These factors emphasize that forecast heterogeneity is not a given constant but rather, that it changes in response to the alignment between private and social interests of the FOMC. We find that forecast revisions are large and remarkably heterogenous across participants. Specifically, the FOMC’s forecast heterogeneity is systematically related to differences in participants’ education, voting status, and regional affiliation, as Romer anticipated. These results should not be surprising: heterogeneity is a built-in feature of the functioning of the Federal Reserve System and the role of the FOMC is to reconcile the differences. The reconciliation of private and public interests, and the implied heterogeneity of courses of action, involves a conversation in which the Chair gets the benefit of the doubt.