"The best way to predict the future is to create it"- Peter Drucker
Think of the brain-power, the computing muscle, the insight, the sheer vested interest the Federal Reserve, as guardians of the monetary policy of the richest country in the world, must have at its disposal to make economic forecasts . . .
Now consider how wrong those forecasts have been.
Dr. James Bullard, President of the St. Louis Federal Reserve Bank, spoke Friday before the CFA Society of Chicago. Central to his presentation, Ghosts & Forecasts, was an explaination of how FMOC forecasts are made, and how (in)accurate they have been in the last few years. The Fed's mandate focuses on two measures - employment and inflation. Consider inflation:
The FMOC has undershot inflation for the last two years - after overshooting it in 2011. Even using its broadest predictor, the Fed was right only twice in the last six years.
Bullard's caveat is that, like Ebeneezer Scrooge and The Ghost of Christmas Present (The Ghost in the presentation's title), their mandate is to predict that which will come to past if the present course is unaltered. The Fed's job is to do that altering if call for, but consider that the Fed's inflation policy target was higher than their highest prediction even. Scary to think how off they would have been if they hadn't been driving policy at the same time.
Unemployment predictions were a little better, only missing half the time and only about as dismal as private forecasts (small comfort). GDP forecasts have been more accurate the last two years.
Click here for the entire presentation
All financial decisions involve prediction, explicit or implicit, yours or someone else's. Because they are part & parcel of portfolio allocation, it's important to recognize their limitations and to temper your reliance on them coming true. This is why you save as much as you can. This is why it is wise to avoid 'sure things' - they don't exist. This is why diversification is prudent move. Because if the Fed can't get economic predictions right, if 'Blue Chip' economists can't forecast employment, are you going to bet your future on your or your broker's guess?