Federal Reserve Chair Jerome Powell said the central bank must be willing to think beyond the complex mathematical simulations it traditionally uses to forecast the economy.
“Intellectual rigor has to be combined with flexibility and agility,” Powell said in opening remarks at a conference celebrating the 100th anniversary of the Fed board’s Division of Research and Statistics.
“Even with state-of-the-art models and even in relatively calm times, the economy frequently surprises us,” Powell said. “But our economy is flexible and dynamic, and subject at times to unpredictable shocks, such as a global financial crisis or a pandemic. At those times, forecasters have to think outside the models.”
The Fed chair did not comment on the outlook for monetary policy or the economy in his remarks.
R&S, as the division is known, provides the Federal Open Market Committee — the Fed panel that sets interest rates — with an economic forecast eight times a year, as well as updates on current data and research on policy and economic topics. The division is currently headed by Stacey Tevlin, the first woman to lead the unit, which employs dozens of PhDs.
Forecasting has been a difficult exercise for the Fed in the post-pandemic economy.
Fed staff continued to call the burst of inflation “transitory” for most of 2021, before it kept accelerating in 2022 and reached a peak annual rate of 7.1% in June of that year.
After a string of bank failures in March 2023, the staff forecast “a mild recession” starting later in the year, before ditching that call a few months later. The economy grew around its long-term trend rate at a 2.1% annualized pace in the second quarter and then boomed at a 4.9% rate in the third quarter.
Fed forecasters “do this work on the biggest stage and with the highest stakes, knowing that the economy very often surprises us,” Powell said, adding that the job takes “large doses of courage and humility.”
Officials next gather Dec. 12-13 and will see fresh reports on retail sales, hiring and inflation before the meeting. Futures markets are pricing in almost no chance of an interest-rate increase, and predict the current level of the Fed’s benchmark rate — 5.25% to 5.5% — will mark the peak of the tightening cycle.
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