Kevin Hassett wrote this morning for Capital Matters about how the members of the Federal Open Market Committee (FOMC) should stop publishing quarterly economic forecasts. The forecasts have regularly been wrong and do not provide useful information to investors or consumers about the future path of economic conditions or monetary policy.

Each quarter, the members of the FOMC forecast real GDP, the unemployment rate, the inflation rate, and federal funds rate. Hassett argues, referencing a new paper by Mickey Levy that demonstrates how inaccurate these forecasts have been, that there’s no reason to keep the forecasts and that they make monetary policy worse.

I’d like to add that the real-GDP forecast is especially worthless and should be discarded even if the forecasts are kept. First, the Fed’s mandate is stable prices and low unemployment, nothing about real GDP. The Fed controls nominal variables (the money supply, nominal interest rates), not real variables, and there are any number of things that affect real GDP that the Fed does not control at all (technology, labor productivity, regulation, etc.). The FOMC members’ guesses as to what will happen to real GDP are hardly better than anyone else’s.

Second, the way the forecasts are done encourages inaccuracy. As Levy explains in his paper, the forecasts from each FOMC member are “conditional on his or her estimate of the ‘appropriate monetary policy’ that would achieve their economic and inflation projections.” That means they are asked to forecast real GDP given that the monetary policy they think is correct gets adopted.

It’s natural to think that the monetary policy you think is correct will be good for the economy. Hardly anyone is going to project their preferred monetary policy will cause a recession. That’s probably part of the reason why nobody on the FOMC predicted the two quarters of negative GDP numbers in the first half of 2022.

As Levy points out, the conditional nature of the forecasts — “This is what I think will happen if we do the right thing,” with the “right thing” defined differently for each member — creates a very basic aggregation problem. The Fed reports each FOMC member’s projections and then averages them. But those really shouldn’t be averaged because they are based on different assumptions.

For example, in the most recent round of projections, the range of appropriate-federal-funds-rate projections for 2025 is from 2.4 percent to 5.6 percent. That’s a pretty big difference. The 2.4 percent person would likely make a different real-GDP projection if he or she thought the federal funds rate would be 5.6 percent instead, and vice-versa. Averaging projections of real-GDP growth based on such different assumptions about the stance of monetary policy doesn’t make very much sense.

The Fed does attach a disclaimer at the end of its projections saying how uncertain they are and regularly reports the margin of error from past projections. It’s not like the FOMC is pretending it knows everything. Which it doesn’t. Which comes back to Hassett’s point: Why make the projections in the first place, especially about a measure the Fed isn’t responsible for?