Regional, individual and political determinants of FOMC members' key macroeconomic forecasts

• Author: Tom Lähner,Stefan Eichler
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/for.2481
• Published date: 01 January 2018

RESEARCH ARTICLE

Regional, individual and political determinants of FOMC

members' key macroeconomic forecasts

Stefan Eichler

1,2

| Tom Lähner

3

1

Chair of International Monetary

Economics, Technische Universität Dresden,

Dresden, Germany

2

Department of Financial Markets, Halle

Institute for Economic Research, Halle,

Germany

3

Institute of Money and International

Finance, Leibniz University Hanover,

Hanover, Germany

Correspondence

Stefan Eichler, Chair of International

Monetary Economics, Technische

Universität Dresden, Dresden, Germany

Email: stefan.eichler@tu‐dresden.de

Abstract

We study Federal Open Market Committee members' individual forecasts of infla-

tion and unemployment in the period 1992–2004. Our results imply that Governors

and Bank presidents forecast differently, with Governors submitting lower inflation

and higher unemployment rate forecasts than bank presidents. For Bank presidents

we find a regional bias, with higher district unemployment rates being associated

with lower inflation and higher unemployment rate forecasts. Bank presidents'

regional bias is more pronounced during the year prior to their elections or for

nonvoting bank presidents. Career backgrounds or political affiliations also affect

individual forecast behavior.

KEYWORDS

FOMC, individualcharacteristics, individual forecasts, regional bias

1|INTRODUCTION

We analyze the forecast determinants of Federal Open Mar-

ket Committee (FOMC) members. Individual forecasts of

key macroeconomic factors (such as unemployment and

inflation rates) are crucial indicators for determining optimal

monetary policy when a forward‐looking policy rule is con-

sidered.

1

Since the FOMC is a committee consisting of 12

voting members (seven members of the Board of Governors

(BoG)

2

and five voting regional Federal Reserve Bank presi-

dents), disagreement about the optimal monetary policy

stance (as shown in many studies) not only leads to dissenting

votes in the FOMC but may also lead to dispersion of

forecasts among FOMC members. Thus analyzing the

determinants of real‐time inflation and unemployment rate

forecasts may improve our understanding of differences in

the monetary policy preferences among FOMC members.

This paper aims to analyze the determinants of FOMC

members' individual inflation and unemployment rate fore-

casts in the period 1992–2004. We add to the existing litera-

ture not only by considering a broadest set of potential

regional, individual, and political characteristics, but also by

testing determinants (such as career backgrounds, electoral

cycles, political affiliation) not previously considered in the

FOMC forecasting literature. Our results indicate consider-

able differences in the economic forecasts between Gover-

nors and Bank presidents. Moreover, forecasts of Bank

presidents are influenced by the unemployment rate in their

1

Haldane and Batini (1999), as well as Rudebusch and Svensson (1999),

compare monetary policy rules and conclude that forward‐looking rules

including forecasts of inflation instead of actual values can improve mone-

tary policy performance relative to a simple benchmark rule (such as pro-

posed in Taylor, 1993). Clarida, Gali, and Gertler (1998) find that so‐called

G3 central banks (Germany, Japan, USA) implicitly have followed a type

of inflation‐targeting regime since 1979, and thus all three central banks indi-

rectly applied a forward‐looking framework. Orphanides (2003) find periods

—such as during the 1970s or mid‐1990s—when a forecast‐based rule did an

even better job in describing FOMC's monetary policy. Orphanides and Wie-

land (2008) use a forecast‐based Taylor rule framework and conclude that

interest rate decisions in the FOMC are driven by their own projections rather

than realized outcomes.

2

When we use the terms Governors or Board members we refer to members

of the Board of Governors throughout the paper.

Received: 29 November 2016 Revised: 1 March 2017 Accepted: 26 May 2017

DOI: 10.1002/for.2481

Journal of Forecasting. 2018;37:119–132. Copyright © 2017 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/for 119