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How Does the FOMC Form Forecasts? An Adaptive Learning Approach Utilizing SEP Data

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Listed:
  • Stephen J. Cole

    (Department of Economics Marquette University)

Abstract

This paper examines how FOMC participants construct their Summary of Economic Projections (SEP) forecasts. FOMC expectations are assumed to contain two components: (1) an endogenous part that follows an adaptive learning model and (2) an exogenous part defined as sentiment (waves of optimism and/or pessimism). The results include key policy takeaways. The forecasts of FOMC members are responsive to new economic information. Their sentiment about future GDP growth and inflation also displays persistence and is correlated with each other. Moreover, FOMC participants rely more on their endogenous/learning model to form expectations. However, sentiment plays a larger role during and around recessions.

Suggested Citation

  • Stephen J. Cole, 2025. "How Does the FOMC Form Forecasts? An Adaptive Learning Approach Utilizing SEP Data," Working Papers and Research 2025-02, Marquette University, Center for Global and Economic Studies and Department of Economics.
    • Handle: RePEc:mrq:wpaper:2025-02
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    File URL: https://epublications.marquette.edu/econ_workingpapers/101
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    More about this item

    Keywords

    summary of economic projections; FOMC; constant-gain learning; sentiment shocks; waves of optimism and pessimism; evolving beliefs; monetary policy;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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