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The Embarrassment of Transparency

May 7, 2015

The Embarrassment of Transparency

Over the past decade or so, “transparency” has become one of the buzzwords that has guided the Federal Reserve’s culture. The word was meant to convey the belief that central banking was best done for all to see in the full light of day, not in the murky back rooms of Washington and New York. The Fed seems to be on a mission to prove that its operations are benevolent, fair, predictable, and equitable. Part of that transparency movement took shape in 2007 when the Fed began publicizing its Gross Domestic Product (GDP) forecasts, which previously (to the frustration of investors) had been kept under wraps. Most of the Fed’s policy moves are tied to how strong, or how weak, it believes the economy will be in the coming year. As a result, its GDP forecast is perhaps the single most important estimate it makes.

So the good news for investors is that the Fed now tells us where it thinks the economy is headed. The bad news is it has been consistently, and sometimes spectacularly, wrong. Talk about the blind leading the blind.

In the eight years that the Fed has issued GDP forecasts in the prior Fall, only once, in 2010, did the actual economic performance come in the range of its expectations (referred to as its “central tendency.”) And even in that year, Fed forecasters did not manage to put the ball through the goal posts. Instead it just hit the upright (the low end of its range: 2.5% in actual growth vs. a central tendency of 2.5% to 3.5%). In all other years the Fed missed the mark completely on the downside. The tale of the tape tells the story:

Central Tendency (The Fed)       Actual Growth (BEA)

2007                       2.4% – 2.5%                                 1.8%

2008                       1.8% – 2.5 %                                -0.30%

2009                       -0.2% – 1.1%                                -2.80%

2010                       2.5 % – 3.5 %                               2.50%

2011                       3.0% – 3.6%                                 1.60%

2012                       2.5% – 2.9%                                 2.30%

2013                       2.3% – 3.0%                                 2.20%

2014                       2.8% – 3.2%                                 2.40%

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