Measuring Inflation Forecast Uncertainty
Looking across a range of statistical models, we consider the likely path of future inflation and the uncertainty surrounding the models' predictions. The models suggest that inflation is on a rising path, and while inflation forecast uncertainty is somewhat elevated relative to the norms of the last 20 years, core inflation uncertainty is relatively low. For both inflation rates, forecast uncertainty is much lower as of the first quarter of 2015 than it was around the Great Recession.
Using an Improved Taylor Rule to Predict When Policy Changes Will Occur
A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way?by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly.
Cyclical versus Acyclical Inflation: A Deeper Dive
This Commentary builds on recent research separating the components of overall inflation into cyclical and acyclical categories, but it does so at a finer level of disaggregation than previous analyses to understand recent inflation developments in the two categories. The inflation rate among cyclically sensitive subcomponents, which comprise roughly 40 percent of overall core PCE inflation, has generally continued to firm in recent years in line with a strengthening labor market and has returned to near pre-Great Recession levels. By contrast, the inflation rate among the acyclical ...
Real-Time Density Nowcasts of US Inflation: A Model-Combination Approach
We develop a flexible modeling framework to produce density nowcasts for US inflation at a trading-day frequency. Our framework: (1) combines individual density nowcasts from three classes of parsimonious mixed-frequency models; (2) adopts a novel flexible treatment in the use of the aggregation function; and (3) permits dynamic model averaging via the use of weights that are updated based on learning from past performance. Together these features provide density nowcasts that can accommodate non-Gaussian properties. We document the competitive properties of the nowcasts generated from our ...
The Usefulness of the Median CPI in Bayesian VARs Used for Macroeconomic Forecasting and Policy
In this paper we investigate the forecasting performance of the median Consumer Price Index (CPI) in a variety of Bayesian vector autoregressions (BVARs) that are often used for monetary policy. Until now, the use of trimmed-mean price statistics in forecasting inflation has often been relegated to simple univariate or Phillips curve approaches, thus limiting their usefulness in applications that require consistent forecasts of multiple macro variables. We find that inclusion of an extreme trimmed-mean measure?the median CPI?improves the forecasts of both core and headline inflation (CPI and ...
Where would the federal funds rate be, if it could be negative?
In the wake of Great Recession, the Federal Reserve engaged in conventional monetary policy actions by reducing the federal funds rate. But soon the rate hit zero, and could go no lower. In such environments, policymakers still think in terms of where the federal funds rate should be, were it possible to go negative. To project the ?unconstrained path? of the funds rate?ignoring the zero lower bound?and to identify the key underlying shocks driving that path, we employ a statistical macroeconomic forecasting model. We find that the federal funds rate would have been extremely negative during ...
On the Relationships between Wages, Prices, and Economic Activity
We take a closer look at the connections between wages, prices, and economic activity. We find that causal relationships between wages and prices are difficult to identify, and the ability of wages to help predict future inflation is limited. Wages appear to be useful in assessing the current state of labor markets, but they are not necessarily sufficient for thinking about where the economy and inflation are going.
The Slowdown in Residential Investment and Future Prospects
Using a statistical model, we find that three factors explain most of the decline in residential investment at the end of 2013 and the beginning of 2014: the increase in mortgage rates since early 2013, the unusually cold winter, and a modest tightening of lending standards in the residential mortgage market. Future prospects for residential investment depend heavily on mortgage rates. A return to normal weather and easing lending standards would boost activity, but even moderate increases in mortgage rates through the end of next year could restrain residential investment going forward.
Food and energy price shocks: what other prices are affected?
Sharp rises in energy and other commodity prices have recently ignited concerns about inflation. Will these price increases spill over to other prices more generally? We study the typical responses of different price shocks and assess whether the recent behavior of producer and consumer prices is consistent with historical norms. Our analysis shows that the behavior of various producer and consumer prices since late 2009 has generally matched up with historical patterns. Overall, our findings suggest that effects of the recent energy and commodity price shocks on core consumer prices will be ...
Forecasting implications of the recent decline in inflation
Should the unanticipated slowing of inflation that has occurred since early 2012 raise doubts about the reliability of inflation forecasts? We answer this question by conducting a few exercises with a common macroeconomic forecasting model. Our results indicate that even though inflation turned out to be much lower than forecasted, it still fell well within a normal range of uncertainty, and most of the deviation from the original forecast was a response to other economic developments.