The Fed: Bad Forecasts and Misguided Monetary Policy

This paper analyzes the Federal Reserve’s quarterly Summary of Economic Projections (SEPs) from September 2020 to December 2022 to document the Fed’s failure to forecast the sharp rise in inflation and its misguided estimates of the Federal funds rate necessary to achieve those projections and considers the sources of the Fed’s errors.

As inflation rose, the Fed persistently projected that inflation would quickly decline toward its 2% inflation target and that maintaining a negative real interest rate was the appropriate monetary policy. Modeling and analytical errors, particularly the failure of the Fed’s macro model to reflect the unprecedented fiscal stimulus and surge in money supply, and human and institutional errors including bad judgment, led to bad forecasts and misguided policy. The paper concludes with suggestions for improvement.