How Good Is the Fed at Its Job? New Report Card Shows the Federal Reserve’s 2012 Unemployment and Inflation Forecasts May Miss the Mark

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MoneyRates.com debuts the Fed Reality Check, a new report card that measures the accuracy of the Federal Reserve’s economic forecasts against year-to-date data. The inaugural Fed Reality Check shows that Fed predictions for 2012 are on track to miss on two of three key economic indicators by year’s end.

The Fed Reality Check conveniently summarizes the Fed’s track record. It may take years to see what the effect of Fed policies has been, but if its near-term forecasts are not accurate, how much faith can we have in policies based on those forecasts?

The Fed Reality Check, a new report card published by personal finance website MoneyRates.com, compares the Federal Reserve Board’s January projections of three key economic indicators – gross domestic product (GDP) growth, unemployment and consumer inflation – with the economy’s subsequent performance on those indicators. The Fed Reality Check will give Fed watchers a place to see whether the central bank’s assumptions about the economy are holding true.

“The Fed Reality Check conveniently summarizes the Fed’s track record in making accurate forecasts, which is a critical area of its performance,” said Richard Barrington, CFA, senior financial analyst for MoneyRates.com. “After all, it may take years to see what the effect of Fed policies has been, but if its near-term forecasts are not accurate, how much faith can we have in policies based on those forecasts?”

The first Fed Reality Check shows that the Fed is pacing to miss the mark on two out of the three indicators unless the economy changes course later in 2012.

  •     Consumer inflation forecasts by individual members of the Federal Reserve Board are off the mark so far this year. The projections for Personal Consumption Expenditure (PCE) inflation ranged from 1.4 to 1.8 percent for the entire year, but the first-quarter figure from the Bureau of Economic Analysis (BEA) was a much higher annualized growth rate of 2.4 percent.
  •     Unemployment rate projections for the final quarter of 2012 ranged from 8.2 to 8.5 percent. The April report from the Bureau of Labor Statistics (BLS) put unemployment at 8.1 percent –which will also be a miss, though a narrow one, unless unemployment rises again before the last quarter.
  •     Fed estimates of GDP growth by year’s end ranged from 2.2 to 2.7 percent. The latest advance GDP growth estimate from the BEA for the first quarter of 2012 was 2.2 percent – just within the Fed’s projected band if GDP growth continues at the same pace or gets slightly stronger for the remainder of the year.

The Fed Reality Check was made possible by the Fed’s recent decision to release regular forecasts for key economic indicators, a move aimed at increasing transparency about its policymaking and helping reduce investor uncertainty.

“Everyone likes to make predictions – but it’s the outcomes that tell you whether the predictions are any good,” said Barrington. “The Fed Reality Check gives the American public a concise report card on the economic predictions of the Fed.”

MoneyRates.com will update the report card as new economic data become available. For more details, please see Fed Reality Check: Testing the Fed’s predictions.

Methodology    
MoneyRates.com bases the Fed Reality Check on projections by individual members of the Federal Reserve Board for the calendar year. It compares these predictions against GDP and consumer inflation data (using the Personal Consumption Expenditure, or PCE, inflation measure) released by the Bureau of Economic Analysis and unemployment data released by the Bureau of Labor Statistics.

Though the Federal Reserve updates its economic projections throughout the year, the Fed Reality Check refers to the first set of predictions in the year to gauge long-term accuracy. For 2012, the first set of economic projections was made during the January 24-25 Federal Open Market Committee meeting. The cited projection range for each indicator is the “central tendency” forecast, in which the high and low outlier projections among the Federal Reserve Board members are discarded.

About MoneyRates.com
MoneyRates.com has been a leading source of information on bank rates, personal finance, savings accounts and investing since 1999. The site provides the highest rates on CDs, money market accounts and high-yield savings accounts. The Web Marketing Association awarded a Financial Services Standard of Excellence to MoneyRates.com in the 2011 WebAwards competition. MoneyRates.com is owned and operated by QuinStreet, Inc. (NASDAQ: QNST), one of the largest Internet marketing and media companies in the world. QuinStreet is committed to providing consumers and businesses with the information they need to find, research and select the products, services and brands that best meet their needs. The company is a leader in visitor-friendly marketing practices. For more information, please visit QuinStreet.com.
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Press Contact
Andrew Heilman
775-784-3842
pr(at)moneyrates(dot)com

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