Board of Governors of the Federal Reserve System

Example Using Previously Published Data

Figure 4.A. Uncertainty and risks in projections of GDP growth

Median projection and confidence interval based on historical forecast errors

Median of projections and 70% confidence interval for years 2016 through 2019. Actual values for years 2011 through 2015.

Change in real GDP
Percent

	2011	2012	2013	2014	2015	2016	2017	2018	2019
Actual	1.7	1.3	2.7	2.5	1.9	-	-	-	-
Upper End of 70% Confidence Interval	-	-	-	-	-	2.8	3.9	4.2	4.1
Median	-	-	-	-	-	1.9	2.1	2.0	1.9
Lower End of 70% Confidence Interval	-	-	-	-	-	1.0	0.3	-0.2	-0.3

FOMC participants' assessments of uncertainty and risks around their economic projections

Uncertainty about GDP growth
Number of participants

	Lower	Broadly similar	Higher
December projections	0	11	6
September projections	1	15	1

Risks to GDP growth
Number of participants

	Weighted to downside	Broadly balanced	Weighted to upside
December projections	1	12	4
September projections	4	12	1

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real GDP from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in Table 2. Because current conditions may differ from those that prevailed on average over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants' current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as "broadly similar" to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as "broadly balanced" would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty."

Figure 4.B. Uncertainty and risks in projections of the unemployment rate

Median projection and confidence interval based on historical forecast errors

Median of projections and 70% confidence interval for years 2016 through 2019. Actual values for years 2011 through 2015.

Unemployment rate
Percent

	2011	2012	2013	2014	2015	2016	2017	2018	2019
Actual	8.7	7.8	7.0	5.7	5.0	-	-	-	-
Upper End of 70% Confidence Interval	-	-	-	-	-	4.8	5.3	6.0	6.4
Median	-	-	-	-	-	4.7	4.5	4.5	4.5
Lower End of 70% Confidence Interval	-	-	-	-	-	4.6	3.7	3.0	2.6

FOMC participants' assessments of uncertainty and risks around their economic projections

Uncertainty about the unemployment rate
Number of participants

	Lower	Broadly similar	Higher
December projections	0	12	5
September projections	1	15	1

Risks to the unemployment rate
Number of participants

	Weighted to downside	Broadly balanced	Weighted to upside
December projections	3	14	0
September projections	2	12	3

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in Table 2. Because current conditions may differ from those that prevailed on average over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants' current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as "broadly similar" to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as "broadly balanced" would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty."

Figure 4.C. Uncertainty and risks in projections of PCE inflation

Median projection and confidence interval based on historical forecast errors

Median of projections and 70% confidence interval for years 2016 through 2019. Actual values for years 2011 through 2015.

PCE inflation
Percent

	2011	2012	2013	2014	2015	2016	2017	2018	2019
Actual	2.7	1.8	1.2	1.2	0.4	-	-	-	-
Upper End of 70% Confidence Interval	-	-	-	-	-	1.7	2.9	3.1	3.0
Median	-	-	-	-	-	1.5	1.9	2.0	2.0
Lower End of 70% Confidence Interval	-	-	-	-	-	1.3	0.9	0.9	1.0

FOMC participants' assessments of uncertainty and risks around their economic projections

Uncertainty about PCE inflation
Number of participants

	Lower	Broadly similar	Higher
December projections	0	13	4
September projections	0	15	2

Risks to PCE inflation
Number of participants

	Weighted to downside	Broadly balanced	Weighted to upside
December projections	2	12	3
September projections	5	11	1

Uncertainty about core PCE inflation
Number of participants

	Lower	Broadly similar	Higher
December projections	0	14	3
September projections	1	16	0

Risks to core PCE inflation
Number of participants

	Weighted to downside	Broadly balanced	Weighted to upside
December projections	2	12	3
September projections	5	11	1

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in Table 2. Because current conditions may differ from those that prevailed on average over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants' current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as "broadly similar" to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as "broadly balanced" would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty."

Figure 5. Uncertainty in projections of the federal funds rate

Median projection and confidence interval based on historical forecast errors

Median of projections and 70% confidence interval* for years 2016 through 2019. Actual (midpoint of target range) values for years 2011 through 2015.

Federal funds rate
Percent

	2011	2012	2013	2014	2015	2016	2017	2018	2019
Actual (midpoint of target range)	0.1	0.1	0.1	0.1	0.4	-	-	-	-
Upper End of 70% Confidence Interval	-	-	-	-	-	0.7	2.8	4.0	5.3
Median	-	-	-	-	-	0.6	1.4	2.1	2.9
Lower End of 70% Confidence Interval	-	-	-	-	-	0.5	0.0	0.2	0.5

Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee's target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the SEP projections for the federal funds rate, primarily because the SEP projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of participants' individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy.

The confidence interval is assumed to be symmetric, except when it is truncated at zero--the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee. This truncation is not intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that prevailed on average over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants' current assessments of the uncertainty and risks around their projections.

* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data is available in Table 2. The shaded area encompasses less than a 70 percent confidence interval if it has been truncated at zero. Return to text

Forecast Uncertainty

The economic projections provided by the members of the Board of Governors and the presidents of the Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events. Thus, in setting the stance of monetary policy, participants consider not only what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.

Table 2 summarizes the average historical accuracy of a range of forecasts, including those reported in past Monetary Policy Reports and those prepared by the Federal Reserve Board's staff in advance of meetings of the Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is similar to that experienced in the past and the risks around the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP would expand within a range of 2.1 to 3.9 percent in the current year, 1.2 to 4.8 percent in the second year, and 0.8 to 5.2 percent in the third and fourth years. The corresponding 70 percent confidence intervals for overall inflation would be 1.8 to 2.2 percent in the current year, 1.0 to 3.0 in the second year, 0.9 to 3.1 percent in the third year, and 1.0 to 3.0 percent in the fourth year. Figures 4.A through 4.C illustrate these confidence bounds in "fan charts" that are symmetric and centered on the median SEP projections for GDP growth, the unemployment rate, and the PCE inflation rate. However, in some instances, the risks around the projections may not be symmetric. In particular, the unemployment rate cannot be negative; furthermore, the risks around a particular projection might be tilted to either the upside or the downside, in which case the corresponding fan chart would be asymmetrically positioned around the median projection.

Because current conditions may differ from those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each economic variable is greater than, smaller than, or broadly similar to typical levels of forecast uncertainty seen in the past 20 years, as presented in Table 2 and reflected in the width of the confidence intervals shown in top panel of Figures 4.A through 4.C. Participants' current assessments of the uncertainty surrounding their projections are summarized in the bottom left panel of those figures. Participants also provide judgments as to whether the risks to their projections are weighted to the upside, are weighted to the downside, or are broadly balanced. That is, while the symmetric historical fan charts shown in the top panel of Figures 4.A through 4.C imply that the risks to participants' projections are balanced, participants may judge that there is a greater risk that a given variable will be above than below their projections. These judgments are summarized in the lower right panels of Figures 4.A through 4.C.

As with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily because each participant's assessment of the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation over time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate would change from that point forward. The final line in Table 2 shows the error ranges for forecasts of short-term interest rates. They suggest that the historical confidence intervals associated with projections of the federal funds rate are quite wide. It should be noted, however, that these confidence intervals are not strictly consistent with the SEP projections for the federal funds rate, since the SEP projections are not forecasts of the most likely quarterly outcomes, but rather are projections of participants' individual assessments of appropriate monetary policy and are on an end-of-year basis. However, the forecast errors should provide a sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that would be appropriate to offset the effects of shocks to the economy.

The fan chart for the federal funds rate in Figure 5 has been truncated at a federal funds rate of zero percent--the bottom of the lowest target range for the federal funds rate that has been adopted by the Committee. This approach to the construction of the federal funds rate fan chart is merely a convention; it does not have any implications for possible future policy decisions regarding the use of negative interest rates to provide additional monetary policy accommodation if doing so were appropriate. In such situations, the Committee could also employ other tools, including forward guidance and asset purchases, to provide additional accommodation.

While Figures 4.A through 4.C provide information on the uncertainty around the SEP economic projections, Figure 1 provides information on the range of views across FOMC participants. A comparison of Figure 1 to Figures 4.A through 4.C shows that the disparity of the projections across participants is much smaller than the average forecast errors over the past 20 years.

Table 2. Average historical projection error ranges

Percentage points

Variable	2016	2017	2018	2019
Change in real GDP1	±0.9	±1.8	±2.2	±2.2
Unemployment rate1	±0.1	±0.8	±1.5	±1.9
Total consumer prices2	±0.2	±1.0	±1.1	±1.0
Short-term interest rate3	±0.1	±1.4	±1.9	±2.4

Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1996 through 2015 that were released in the winter by various private and government forecasters. As described in the box "Forecast Uncertainty," under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the federal funds rate will be in ranges implied by the average size of projection errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), "Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve's Approach," Finance and Economics Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), available at www.federalreserve.gov/econresdata/feds/2017/files/2017020pap.pdf.

1. Definitions of variables are in the general note to table 1. Return to table

2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. Return to table

3. For Federal Reserve staff forecasts, measure is the federal funds rate. For other forecasts, measure is the rate on 3-month Treasury bills. Historical projections are the average level in the fourth quarter of the year indicated, in percent. Return to table