Strategic forecasting on the FOMC

The Federal Open Market Committee (FOMC) of the Federal Reserve consists of voting and non-voting members. Apart from deciding about interest rate policy, members individually formulate regular inflation forecasts. This paper uncovers systematic differences in individual inflation forecasts submitted by voting and non-voting members. Based on a data set with individual forecasts recently made available it is shown that non-voters systematically overpredict inflation relative to the consensus forecast if they favor tighter policy and underpredict inflation if they favor looser policy. These findings are consistent with non-voting member following strategic motives in forecasting, i.e. non-voting members use their forecast to influence policy.

Research highlights► At almost all major central banks monetary policy is set not by a single decision maker but by a monetary policy committee of experts. ► These committees often consist of members with heterogeneous preferences, different backgrounds and career concerns as well as different regional and institutional affiliations. As a consequence of heterogeneity of monetary policy committees, committee members potentially behave strategically. ► The Federal Open Market Committee (FOMC) of the Federal Reserve consists of voting- and non-voting members. Apart from deciding about interest rate policy, members individually formulate regular inflation forecasts. ► Based on a data set with individual forecasts recently made available it is shown that non-voters systematically overpredict inflation relative to the consensus forecast if they favor tighter policy and underpredict inflation if they favor looser policy. These findings are consistent with non-voting member following strategic motives in forecasting, i.e. non-voting members use their forecast to influence policy.