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Print{{p}}Table 1: Keywords in the FOMC Minutes, Their Assessment, and the
Corresponding FOMC Minutes Index.{{p}}Keywords Assessment FOMC Minutes Index
(percent per annum){{p}}Strong, robust, considerable, upbeat, brisk, surge
Strong growth 4.0{{p}}Normal, solid, steady Normal growth 3.4{{p}}Modest,
moderate, sustainable Modest growth 2.8{{p}}Slow, gradual, subdued, muted Slow
growth 2.1{{p}}Unclear, mixed Unclear 1.5{{p}}Decelerating, stabilizing,
ongoing adjustment, leveling out Decelerating growth 0.9{{p}}Continued
weakness, sluggish, slack, below potential Continued weakness
0.3{{p}}Declining, deteriorating Decline -0.4{{p}}Recession, contraction,
sharp and widespread decline Recession -1.0{{p}}February 12,
2016{{p}}Predicting Fed Forecasts{{p}}Neil R. Ericsson1{{p}}Monetary policy
decisions by the Fed's Federal Open Market Committee (FOMC) have attracted
considerable attention in recent years,{{p}}especially with quantitative
easing through large-scale asset purchases, the introduction of forward
guidance, and December's "lift-off"{{p}}after seven years of a near-zero
federal funds rate. The FOMC's decisions are based in part on the Greenbook
forecasts, which are{{p}}economic forecasts produced by the Federal Reserve
Board's staff and which are presented to the FOMC prior to their policy
meetings.{{p}}This note shows that the minutes of the FOMC meetings--and the
information in those minutes about the Greenbook
forecasts--provide{{p}}valuable insights into the decision-making process of
the FOMC.{{p}}Recent analysis by Herman Stekler and Hilary Symington lays the
foundation for these results.2 Stekler and Symington constructed{{p}}indexes
that quantify the FOMC's views about the U.S. economy, as expressed in the
minutes of the FOMC's meetings for 2006–2010.{{p}}This note compares these
indexes with publicly available Greenbook forecasts, including the recently
released 2010 Greenbook{{p}}forecasts. The indexes very closely track the
Greenbook forecasts of the current-quarter and one-quarter-ahead U.S. real GDP
growth{{p}}rates--particularly so for the sixteen forecasts in 2010, even
though those forecasts were not available when the indexes
were{{p}}constructed. Stekler and Symington's indexes thus provide a proximate
and relatively accurate mechanism for inferring Greenbook{{p}}forecasts, well
in advance of the public release of the Greenbook. The Greenbook is not
released to the public until more than five years{{p}}after it is presented to
the FOMC, whereas the minutes of an FOMC meeting are published just three
weeks after the meeting itself.{{p}} Background: Stekler and Symington's
Indexes{{p}}Stekler and Symington employ a focused textual analysis of the
minutes for the 40 FOMC meetings during 2006–2010, a period that{{p}}spans the
financial crisis and leads into the Great Recession. From their textual
analysis, Stekler and Symington construct quantitative{{p}}indexes that gauge
the FOMC's views on the current and future strength of the U.S. economy, as
expressed in the FOMC minutes{{p}}themselves. The indexes are scaled such that
they correspond to real GDP growth rates in percent per annum.{{p}}
Source:{{p}}Stekler and{{p}}Symington{{p}}(2015, Tables{{p}}2 and 4).{{p}}To
design{{p}}their{{p}}indexes,{{p}}Stekler
and{{p}}Symington{{p}}examine{{p}}certain{{p}}sections of{{p}}the
minutes{{p}}that discuss:{{p}}the{{p}}current economic outlook, typically in a
paragraph or paragraphs beginning "The information reviewed at the ...
meeting{{p}}suggested that ... "; and{{p}}i.{{p}}the future economic outlook,
typically in a paragraph or paragraphs beginning "In their discussion of the
economic situation{{p}}and outlook, meeting participants ... ".{{p}}ii.{{p}}In
these sets of paragraphs, Stekler and Symington search for select keywords
that characterize views on the outlook. Keywords range{{p}}from "strong" and
"robust" for a very optimistic outlook to "recession" and "contraction" for a
very pessimistic one. From the frequencies{{p}}of occurrence of the keywords,
Stekler and Symington create two indexes, one for the current outlook and one
for the future outlook.{{p}}These indexes are called FOMC Minutes Indexes (or
FMIs) below. Table 1 lists the keywords, Stekler and Symington's assessment
of{{p}}those keywords for economic growth, and the corresponding values for
the FMI.{{p}}From a broader perspective, three steps lead to the FMIs.{{p}}
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of 5 2/16/2016 12:16 PM{{p}}Figure 1: The current-outlook and future-outlook
FMIs, the Greenbook forecasts of the current-quarter and{{p}}one-quarter-ahead
U.S. real GDP growth rates, and the differentials between the FMI and
Greenbook forecasts.{{p}}Accessible version{{p}}Figure 2: The
truncation-adjusted FOMC Minutes Index for the current outlook, the Greenbook
forecast of the U.S.{{p}}real GDP growth rate in the current quarter, and ±1
standard error bands for the FMI's predictions in 2010.{{p}}Meeting of the
FOMC. The FOMC meets to discuss monetary policy, with the Greenbook forecasts
and certain qualitative{{p}}and quantitative information in
hand.{{p}}a.{{p}}b. Writing of the FOMC minutes. Minutes of the meeting are
then prepared and made public.3{{p}}Quantification of the FOMC minutes. From
textual analysis of the FOMC minutes, Stekler and Symington quantify the tone
of{{p}}the FOMC's discussion about the current and future outlook of the U.S.
economy and calibrate that quantification to{{p}}forecasts of the GDP growth
rate, thereby generating the FMI.4{{p}}c.{{p}}The Greenbook forecasts are
provided to the FOMC participants, prior to the FOMC meeting, and hence the
FMI--through the FOMC's{{p}}policymaking process--may depend on the Greenbook
forecasts. This characterization applies to the FMIs for both the current
outlook{{p}}and the future outlook.{{p}}Comparion{{p}}of the FMI{{p}}with
the{{p}}Greenbook{{p}}Forecast{{p}}It is thus of{{p}}interest to{{p}}compare
the{{p}}FMI directly{{p}}with the{{p}}Greenbook{{p}}forecast, as{{p}}in Figure
1.{{p}}Figure 1a{{p}}plots two{{p}} "nowcasts":{{p}}the FMI for{{p}}the
current{{p}}outlook, and{{p}}the{{p}}Greenbook{{p}}forecast for{{p}}the
current{{p}}quarter.{{p}}Figure 1b{{p}}plots two forecasts: the FMI for the
future outlook, and the Greenbook forecast for one quarter ahead. Figure 1c
plots the difference{{p}}between the FMI for the current outlook and the
Greenbook forecast for the current quarter; and Figure 1d plots the difference
between{{p}}the FMI for the future outlook and the Greenbook forecast for one
quarter ahead. In Figure 1 (and likewise in Figures 2 and 3 below),
the{{p}}horizontal axis specifies the date of the FOMC meeting to which a
Greenbook is submitted and from which an FMI is constructed. The{{p}}graphs in
Figure1 show that the FMI and the Greenbook forecasts are generally very close
numerically, whether for the current outlook{{p}}or for the future
outlook.{{p}}That said, the FMI does deviate markedly from the Greenbook
forecast in December 2008, January 2009, and March 2009: see the{{p}}boxed-in
areas in Figure 1. For these FOMC meetings, the FMI is at its minimum (= –1.0%
per annum, which is the most pessimistic{{p}}outlook allowed in Stekler and
Symington's framework), whereas the Greenbook forecasts are typically much
more negative. This{{p}}discrepancy between the FMI and the Greenbook forecast
arises because Stekler and Symington's FMI as constructed from Table
1{{p}}cannot be more negative than –1%, thereby truncating the distribution of
the forecast implicit in the FOMC minutes. Thus, in the next{{p}}section,
these three meetings are treated separately from the other meetings when
"predicting" the Greenbook forecasts from the FMI.5{{p}}Predicting Greenbook
Forecasts{{p}}As Figure 1 implies, the FMI very closely approximates the
Greenbook forecast, once accounting for the FMI's truncation in
December{{p}}2008, January 2009, and March 2009. This close relationship
between the FMI and the Greenbook forecast presents a special{{p}}opportunity
for "predicting" Greenbook forecasts, conditional on the FMI, noting that the
minutes of an FOMC meeting are publicly{{p}}available three weeks after the
meeting, whereas the Greenbook forecasts are not released to the public until
more than five years after{{p}}the Greenbook itself is presented to the FOMC.
When Stekler and Symington calculated FMIs for 2006–2010, they did not have
the{{p}}2010 Greenbook forecasts available, so their FMIs can be used to
predict the 2010 Greenbook forecasts. Moreover, with the recent{{p}}release of
the 2010 Greenbooks, those predictions from the FMIs can now be assessed
against the actual 2010 Greenbook forecasts.6{{p}}Figure 2{{p}}plots
the{{p}}truncation-adjusted{{p}}current-{{p}} FRB: IFDP Note: Predicting Fed
Forecasts
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of 5 2/16/2016 12:16 PM{{p}}Accessible version{{p}}Figure 3: The
truncation-adjusted FOMC Minutes Index for the future outlook, the Greenbook
forecast of the U.S.{{p}}real GDP growth rate one quarter ahead, and ±1
standard error bands for the FMI's predictions in 2010.{{p}}Accessible
version{{p}}Table 2: Root mean squared errors and other summary statistics for
the deviation between the Greenbook forecast{{p}}of the U.S. real GDP growth
rate and the FMI, for both current-quarter and one-quarter-ahead forecast
horizons.{{p}}Forecast horizon{{p}}Sample period{{p}}RMSE Mean Standard
deviation{{p}}Current quarter{{p}}2006-2009 0.96 -0.26 0.94{{p}}2010 0.65
-0.14 0.68{{p}}2006-2010 0.90 -0.23 0.88{{p}}outlook FMI,{{p}}along
with{{p}}the{{p}}Greenbook{{p}}forecast of{{p}}the
current{{p}}quarter's{{p}}U.S. real{{p}}GDP growth{{p}}rate. The{{p}}FMI and
the{{p}}Greenbook{{p}}forecast are{{p}}very
close{{p}}numerically,{{p}}with{{p}}deviations{{p}}between{{p}}them
being{{p}}small,{{p}}typically less{{p}}than 1% per{{p}}annum and{{p}}often
less{{p}}than 0.5%{{p}}per annum.{{p}}Figure 3{{p}}plots
the{{p}}truncation-adjusted{{p}}future-outlook{{p}}FMI{{p}}and
the{{p}}Greenbook{{p}}forecast for{{p}}one quarter{{p}}ahead.
Their{{p}}deviations{{p}}are small as{{p}}well.{{p}}Figures 2{{p}}and 3
also{{p}}include ±1{{p}}standard{{p}}error bands{{p}}for the FMI{{p}}in 2010,
with{{p}}those bands derived from the properties of the FMIs and the Greenbook
forecasts over 2006–2009. For each FMI (current-outlook
or{{p}}future-outlook), only one of the eight Greenbook forecasts in 2010 lies
outside those bands--significantly fewer outliers than the{{p}}one-in-three
expected for ±1 standard error bands. The 2010 predictions range between 2.1%
and 3.4% for both the current outlook and{{p}}the future outlook, with
somewhat different dynamics for the two forecast horizons. The forecast
standard error is under 1%.{{p}}Note. Units{{p}}are quarterly{{p}}rates,
in{{p}}percent per{{p}}annum.{{p}}In light
of{{p}}the{{p}}discussion{{p}}above, Table{{p}}2{{p}}numerically{{p}} FRB:
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of 5 2/16/2016 12:16 PM{{p}}Forecast horizon{{p}}Sample period{{p}}RMSE Mean
Standard deviation{{p}}One quarter ahead{{p}}2006-2009 0.84 -0.09
0.85{{p}}2010 0.55 0.31 0.49{{p}}2006-2010 0.79 -0.00
0.80{{p}}assesses{{p}}the{{p}}discrepancies between the FMIs and the Greenbook
forecasts over three periods: 2006–2009, 2010, and 2006–2010. Root
mean{{p}}squared errors (RMSEs) are less than 1% per annum for all sample
periods and for both forecast horizons. Notably, the{{p}}one-quarter-ahead
RMSEs are smaller than the current-quarter RMSEs. That is, Stekler and
Symington's indexes are more accurate at{{p}}inferring the one-quarter-ahead
Greenbook forecast than the current-quarter Greenbook forecast. Also, both
FMIs are much more{{p}}accurate at inferring the Greenbook forecasts for 2010
than they are at inferring the Greenbook forecasts for
2006–2009.{{p}}Remarks{{p}}Several observations are germane. First, textual
analysis--such as that employed by Stekler and Symington--is common in the
literature.{{p}}Similar examples include Boukus and Rosenberg (2006), who
assess the roles of different themes in the FOMC's minutes; and
Meade,{{p}}Burk, and Josselyn (2015), who calculate the changing frequencies
of different quantitative words in the FOMC's minutes to ascertain{{p}}the
diversity of views among the FOMC members and participants.{{p}}Second,
Stekler and Symington's analysis is novel by quantifying qualitative text from
the minutes on the outlook. By contrast, Meade,{{p}}Burk, and Josselyn focus
on the disparity of views in the minutes, rather than on some central tendency
of views. Banternghansa and{{p}}McCracken (2009, 2014) likewise focus on the
disparity of views, albeit as measured by individual participants' economic
forecasts. Yet{{p}}other researchers such as Nunes (2013) have compared the
Greenbook forecasts and FOMC participants' forecasts with each other,{{p}}with
other forecasts, and with the actual outcomes.{{p}}Third, the current-outlook
FMI draws on text about the Federal Reserve Board staff's views, whereas the
future-outlook FMI ostensibly{{p}}reflects the views of the FOMC participants
on both current conditions and future outlook. While these nuances may affect
the{{p}}interpretation of the FMIs when compared with the Greenbook forecasts,
the similarity of the FMIs and the Greenbook forecasts{{p}}suggests
not.{{p}}Fourth, it may seem surprising that FOMC participants' views for the
future outlook--as measured by the future-outlook FMI--are{{p}}well-captured
by the one-quarter-ahead Greenbook forecast, since the policy-relevant horizon
may be somewhat longer than just one{{p}}quarter ahead. The future-outlook FMI
may thus be an even better proxy for Greenbook forecasts at longer horizons.
Or, participants{{p}}may down-weight Greenbook forecasts at longer horizons if
they view those forecasts as being uninformative; see Chang and
Hanson{{p}}(2015).{{p}}Finally, indexes have yet to be constructed for
2011–2015 or for the period prior to 2006. Indexes over those periods may be
more or{{p}}less accurate than those over 2006–2010. The indexes also could be
generated algorithmically, drawing on Table 1.{{p}}Conclusions{{p}}Stekler and
Symington propose and build innovative quantitative indexes (the "FMIs") that
measure the extent of optimism or pessimism{{p}}expressed in the FOMC's
minutes on the current and future outlook for the U.S. economy. Even though
the text that Stekler and{{p}}Symington examine includes little or no
quantitative information, Stekler and Symington's FMIs reveal much about the
thinking of the{{p}}FOMC participants and about the Federal Reserve Board
staff's input to the FOMC meetings.{{p}}The present note shows that these
indexes can help infer the staff's Greenbook forecasts of the U.S. real GDP
growth rate, years before{{p}}the public release of the Greenbook. The FOMC
minutes are thus highly informative about a key input to monetary
policymaking.{{p}}References{{p}}Banternghansa, C., and M. W. McCracken (2009)
"Forecast Disagreement Among FOMC Members", Federal Reserve Bank of St.
Louis{{p}}Working Paper No. 2009–059A, Research Division, Federal Reserve Bank
of St. Louis, St. Louis, Missouri, December.{{p}}Banternghansa, C., and M. W.
McCracken (2014) "The Effect of FOMC Forecast Disagreement on U.S.
Treasuries", Presentation,{{p}}International Symposium on Forecasting,
Rotterdam, The Netherlands, July 1.{{p}}Boukus, E., and J. V. Rosenberg (2006)
"The Information Content of FOMC Minutes", mimeo, Federal Reserve Bank of New
York, New{{p}}York, July.{{p}}Chang, A. C., and T. J. Hanson (2015) "The
Accuracy of Forecasts Prepared for the Federal Open Market Committee", Finance
and{{p}}Economics Discussion Series Paper No. 2015–062, Board of Governors of
the Federal Reserve System, Washington, D.C., July.{{p}}Danker, D. J., and M.
M. Luecke (2005) "Background on FOMC Meeting Minutes", Federal Reserve
Bulletin, 2005, Spring, 175–179.{{p}}Doornik, J. A. (2009) "Autometrics",
Chapter 4 in J. L. Castle and N. Shephard (eds.) The Methodology and Practice
of Econometrics: A{{p}}Festschrift in Honour of David F. Hendry, Oxford
University Press, Oxford, 88–121.{{p}}Doornik, J. A., and D. F. Hendry (2013)
PcGive 14, Timberlake Consultants Press, London (3 volumes).{{p}} FRB: IFDP
Note: Predicting Fed Forecasts
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of 5 2/16/2016 12:16 PM{{p}}Accessibility Contact Us Disclaimer Website
Policies FOIA PDF Reader{{p}}Ericsson, N. R. (2015) "Eliciting GDP Forecasts
from the FOMC's Minutes Around the Financial Crisis", International Finance
Discussion{{p}}Paper No. 1152, Board of Governors of the Federal Reserve
System, Washington, D.C., November, dx.doi.org/10.17016{{p}}/IFDP.2015.1152 ;
and RPF Working Paper No. 2015–003, Research Program on Forecasting, Center of
Economic Research,{{p}}Department of Economics, The George Washington
University, Washington, D.C., November, www.gwu.edu/~forcpgm/2015-003.pdf
;{{p}}International Journal of Forecasting, in press.{{p}}Meade, E. E., N. A.
Burk, and M. Josselyn (2015) "The FOMC Meeting Minutes: An Assessment of
Counting Words and the Diversity of{{p}}Views", FEDS Note, Board of Governors
of the Federal Reserve System, Washington, D.C., May 26.{{p}}Nunes, R. (2013)
"Do Central Banks' Forecasts Take Into Account Public Opinion and Views?",
International Finance Discussion Paper{{p}}No. 1080, Board of Governors of the
Federal Reserve System, Washington, D.C., May.{{p}}Stekler, H. O., and H.
Symington (2015) "Evaluating Qualitative Forecasts: The FOMC Minutes,
2006–2010", RPF Working Paper No.{{p}}2014–005 (September 2014; revised:
February 2015), Research Program on Forecasting, Center of Economic Research,
Department of{{p}}Economics, The George Washington University, Washington,
D.C., cer.columbian.gwu.edu/files/2014-005-2.pdf ; International
Journal{{p}}of Forecasting, dx.doi.org/10.1016/j.ijforecast.2015.02.003 , in
press.{{p}}1. The author is a staff economist in the Division of International
Finance, Board of Governors of the Federal Reserve System, Washington, DC
20551 USA{{p}}(ericsson@frb.gov), and a Research Professor of Economics,
Department of Economics, The George Washington University, Washington, DC
20052 USA{{p}}(ericsson@gwu.edu). The views expressed in this paper are solely
the responsibility of the author and should not be interpreted as necessarily
representing or{{p}}reflecting the views of the Federal Open Market Committee,
its principals, the Board of Governors of the Federal Reserve System, or of
any other person{{p}}associated with the Federal Reserve System. This paper
uses publicly available information, and only publicly available information.
It does not use any{{p}}internal or confidential Federal Reserve Board
information, either directly or indirectly. The author is grateful to Chris
Erceg, Lowell Ericsson, Nancy Ericsson,{{p}}Joe Gruber, David Hendry, Lucas
Husted, Matteo Iacoviello, Freja Ingelstam, Aaron Markiewitz, Jaime Marquez,
Ellen Meade, J Seymour, Tara Sinclair,{{p}}Herman Stekler, and Joyce Zickler
for helpful discussions and comments. All numerical results were obtained
using PcGive Version 14.0B3, Autometrics{{p}}Version 1.5e, and Ox Professional
Version 7.00 in 64-bit OxMetrics Version 7.00: see Doornik and Hendry (2013)
and Doornik (2009). Return to text{{p}}2. See Stekler and Symington (2015) and
Ericsson (2015) for further details. Return to text{{p}}3. See Danker and
Luecke (2005) for a valuable perspective on the evolution of the FOMC's
minutes. Return to text{{p}}4. In fact, Stekler and Symington's procedure
itself involves two steps but, for expositional purposes, this description
merges them into a single-step{{p}}quantification of the FOMC minutes. Return
to text{{p}}5. Ericsson (2015, Sections 2–3) describes the econometric
methodology for handling these three meetings during the extenuating
circumstances of the{{p}}financial crisis, and it provides details of the
online sources for the publicly available Greenbook forecasts and FOMC
minutes. Return to text{{p}}6. Starting in 2010, the Greenbook forecasts
appear in a Fed document called the Tealbook, which combines the previous Fed
documents called the{{p}}Greenbook and the Bluebook. For simplicity, these
more recent forecasts are still referred to as "Greenbook forecasts" herein.
Return to text{{p}} Disclaimer: IFDP Notes are articles in which Board
economists offer their own views and present analysis on a range of topics
in{{p}}economics and finance. These articles are shorter and less technically
oriented than IFDP Working Papers.{{p}}Last update: February 12, 2016{{p}}Home
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