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Abstract:
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Monetary policy influences real activity and inflation with a lag. Thus, central banks need to be forward-looking when choosing a path for the policy rate that will keep inflation low and output near potential. To help solve this problem, the Federal Reserve staff regularly prepares forecasts for the U.S. economy that extend several years into the future. These forecasts have three key features. First, they are judgmental projections that reflect an informal pooling of forecasts derived from statistical filters and econometric models, estimates derived from economic literature, and anecdotal information. Second, they are conditional projections incorporating specific assumptions for exogenous factors, such as fiscal policy and the objectives of policymakers. Finally, the projections tell a sufficiently detailed story to make them a useful organizing device for the policy debate.
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