Liberty Street Economics

« | Main | »

September 9, 2013

Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting

Richard K. Crump, Stefano Eusepi, and Emanuel
Moench

Following the June 18-19 Federal Open Market
Committee (FOMC) meeting different measures of short-term interest rates
increased notably. In the chart below, we plot two such measures: the two-year
Treasury yield and the one-year overnight indexed swap (OIS) forward rate, one
year in the future. The vertical line indicates the final day of the June FOMC
meeting. To what extent did this rise in rates following the June FOMC meeting
reflect a shift in the expected future path of the federal funds rate (FFR)?
Market participants and policy makers often directly read the expected path
from financial market data such as the OIS contracts. In this post, we take an
alternative approach by looking at surveys of professional forecasters to
assess how expectations changed.


Short-Term-Rates-around-the-June-FOMC-Meeting

    The advantage of market-based
measures is that, unlike survey data, they are available at very high
frequencies. However, changes in market-based measures of expectations may be
obfuscated by significant changes in investors’ risk assessment—changes in so-called term premia (see this Liberty Street Economics blog
post
for more information on term premia). For example, the OIS is an
agreement where one party pays a specified fixed interest rate payment in
return for a floating interest rate payment based on the FFR. Movements in the
OIS rate thus reflect changes in market participants’ expectations of the
future evolution of the FFR as well as the compensation they require for
bearing the risk that actual outcomes may be different from what they expect.

    In the chart below we present two scenarios.
The panel on the top gives the expected path of the FFR from the June Blue
Chip Financial Forecasts (BCFF) survey (conducted on May 22-23) and the panel
below gives the path from the July survey (conducted a few days after
the June FOMC meeting, on June 24-25). The BCFF survey is a survey of forecasts
on economic and financial indicators taken over a wide range of institutions
(for more details, see here).
The solid blue line in each panel shows the median forecast for the horizons
available in each survey (the July survey extended the horizon to the fourth
quarter of 2014). Encasing the median forecast are the 25th and 75th percentile
forecasts displayed as dotted black lines. None of these three series shows any
meaningful changes after the June FOMC meeting. Solid red lines indicate the
market-implied FFR path from OIS contracts observed on the same days as the
surveys were conducted. While survey and financial market measures were basically
aligned before the FOMC meeting, the market-implied path shoots up in late June.
For comparison, the majority of professional forecasters in the July survey do
not expect the FFR to be above the range of 0 to 0.25 percent through the end
of 2014. In contrast, the path of the red solid line is roughly consistent with
the FFR leaving this range in mid-2014.

Expected-Fed-Funds-Rates

    These findings may be only suggestive
given the length of time between the June and July BCFF surveys. We deal with
this drawback in two ways. First, we have included as dash-dotted purple lines the
market-implied path right before and after the June FOMC meeting. The
market-implied path right before the meeting is very similar to the average
path observed on the June survey dates. The market-implied path right after the
meeting shows that most of the adjustment to OIS rates occurred soon after the
FOMC meeting. Second, we use information
from the Blue Chip Economic Indicators (BCEI) survey. The June BCEI survey
conducted on June 5-6 has twenty-eight participants in common with the July
BCFF survey (approximately half of the respondents in each survey). This exercise
allows us to evaluate changes in survey forecasts in a narrower window around
the June FOMC meeting (see this blog
post
for an example of this approach for the August 2011 FOMC meeting). We
use forecasts of the three-month Treasury bill because the BCEI does not
collect forecasts for the FFR. The three-month Treasury bill and the FFR
typically move in lockstep.

    The next chart shows two
estimated distributions for the average level of the three-month Treasury bill
for 2014. The blue and red solid lines display these estimated distributions
across the twenty-eight forecasters in the surveys taken before and after the
FOMC meeting, respectively. This plot shows that narrowing the window around
the FOMC date does not alter the conclusions. There was almost no change
between professional forecasts of short-term interest rates before and after
the June FOMC meeting.

Forecast-Distribution-for-Average-3-month-T-Bill-in-2014

    The main takeaway from our analysis is
that professional forecasters did not interpret Fed communication around the
FOMC meeting as signaling a change in the likely path for the FFR. Then how do
we reconcile the fact that interest rates rose substantially, but professional
forecasts showed little change? The most likely explanation is that the shift
in interest rates was attributable to changes in term premia as investors
shifted their risk assessment over this period. This interpretation is
consistent with a
comparative historical analysis
of this period posted on this blog.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.


 
Crump_richard
Richard K. Crump is a senior economist in the New York Fed’s Research and Statistics Group.

 
Eusepi_stefano
Stefano Eusepi is a research officer in the Group.

 
Moench_emanuel
Emanuel Moench is a senior economist in the Group.

About the Blog

Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.

Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

Economic Research Tracker

Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.

Comment Guidelines

We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:

Please be brief: Comments are limited to 1500 characters.

Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.

Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.

Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.‎

Send Us Feedback

Disclosure Policy

The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.

Archives