Changes to Fed Communications #2
Post 2 of 3 coauthored with my former Federal Reserve colleague John Roberts
You can find John here.
A Fed staff forecast?
We begin this second post by repeating a point we made in our initial post: We think it would be confusing to the public if the FOMC published two sets of projections. Thus, if a staff forecast is to be published, it must replace the SEP. And, because the SEP relays policymaker views, if a staff forecast is to avoid representing a step backward in terms of transparency, it must incorporate important policymaker input.
Forecasts at other central banks
The ideal forecast resembles the ones published by the central banks in New Zealand, Norway, and Sweden. These forecasts are an official product of the monetary policy committee and, importantly, include a consensus projection for the path of the policy interest rate. These are small monetary policy committees—seven members for the RBNZ and five each for the Norges Bank and Riksbank—which may make reaching consensus relatively straightforward.[1]
The Bank of England (BoE) and ECB also release forecasts, both premised on an interest rate path implied by financial market prices. The nine-member committee at the BoE votes on the forecast, with a relatively low bar for approval.[2] The ECB’s forecast is not subject to a formal vote; it is a staff forecast.[3] That said, the forecast is prepared under the supervision of the ECB’s chief economist, who is a policymaker and member of the Governing Council, and advises the staff during the forecast preparation process.
An obvious drawback of the BoE and ECB forecasts is that they do not include committee interest-rate forecasts but instead rely on market-based interest-rate paths. Thus, the projections cannot be used to draw inferences about the monetary policy reaction function, and along this dimension, fall short of the information provided by the Fed’s current SEP.
The FOMC most resembles the ECB’s Governing Council in terms of size and composition. At twelve, the FOMC is a large Committee—even bigger if you consider that input is provided by all nineteen policymakers who attend the meetings and submit projections quarterly for the SEP. And while casting a vote on the FOMC is limited to twelve “members,” the rotation of votes every year makes it desirable to secure a broad consensus for policy actions. As well, the twelve Fed policymakers are dispersed around the United States, heading their own regional Reserve Banks, making for substantial diversity of perspective—similar to the hub-and-spoke structure of the ECB and its national central banks.
So while our ideal forecast is one premised on a committee policy path and subject to committee approval, it may be difficult for the Fed to fully achieve that ideal. Historical experience is suggestive. In 2012, the FOMC tried, and failed, to produce a consensus forecast. At FOMC meetings in August and September of that year, policymakers considered a forecast formulated from staff input, the SEP, and input from Chair Bernanke and other policymakers. While there was general support for the goal of the exercise, the FOMC meeting minutes related that “most participants judged that, given the diversity of their views about the economy’s structure and dynamics, it would be difficult for the Committee to agree on a fully specified longer-term path for monetary policy to incorporate into a quantitative consensus forecast in a timely manner, especially under present conditions in which the policy decision comprises several elements.”[4] This exercise demonstrated that getting to consensus on a forecast can be fraught; publication of a forecast without full consensus could undermine the advantages of forecast publication. For these sorts of reasons, the FOMC abandoned its efforts.
The role of the monetary policy assumption and other conditioning assumptions
The G-30 report suggests that the current staff forecast could be published more-or-less as is. Bernanke, on the other hand, indicates that a staff forecast would need to include policymaker input. We agree with Bernanke: To be useful as a means of enhancing the public’s understanding of policy, a published central bank forecast must include policymaker input.
While a policymaker consensus view on monetary policy would be ideal, as we just discussed, achieving that ideal proved to be a stumbling block for the FOMC in 2012. And there are other sensitive issues, such as fiscal policy assumptions, that we feel must also ultimately come from policymakers. As an example, the staff forecast in December 2016 included a placeholder assumption for a Tax Cuts and Jobs Act, which was not yet formulated because the incoming President had not been inaugurated. While the assumption was sensible and the legislation was ultimately passed, we’re pretty sure the FOMC would not feel comfortable delegating speculation on future fiscal policy of a not-yet-inaugurated President in a published forecast to the staff. So we see any staff forecast as an augmented one, reflecting policymaker input on the path for monetary policy and other sensitive underlying assumptions.
A key question, then, becomes: How can this be done? We can imagine several approaches: For example, the monetary policy assumption could be generated using a Taylor-type policy rule that is agreed upon by policymakers. A major drawback would be that designation of a rule could suggest that Fed policymakers follow the rule in setting policy, an impression the Fed has sought to avoid. The Fed’s Monetary Policy Report notes, “As part of their monetary policy deliberations, policymakers regularly consult the prescriptions of a variety of simple interest rate rules without mechanically following the prescriptions of any particular rule.”[5]
Another approach would have the staff directed to reflect information collected from policymakers in its forecast. To be workable, the collected policymaker input must be channeled through a small group. We could imagine that group being the FOMC chair; a designated policymaker, along the lines of the ECB chief economist; or a small group, such as the (currently informal) “Troika” or yet another group.
Our proposed process for providing policymaker guidance on the staff forecast will inevitably imply a shift in power within the Committee, enhancing the power of those policymakers relative to that of their peers. That concentration of power stands in contrast to the current SEP, where all the projections are given equal weight (although more public attention is ultimately paid to forecasts near the center or median).
Once the assumptions are chosen and an augmented staff forecast has been generated, it should be straightforward to generate alternative scenarios around the augmented staff baseline. A key question for policymakers in considering a move to a staff forecast, then, is whether the advantages of such an augmented staff forecast—including an informative narrative and the potential for alternative scenarios—are sufficiently large enough to outweigh the consolidation of power near the center that would be required to lay out the monetary policy and other forecast assumptions.
Governance
It is very unlikely that all Fed policymakers will agree on the details of any forecast. Indeed, diversity of views is one of the virtues of a committee process. We would suggest, then, that the hurdle for approval of the staff forecast be low, a “can-you-live-with-this” test. Joint publication of alternative scenarios may help in this regard. Policymakers could be asked to briefly describe any strong objections to the forecast. A written summary of their objections and assessments of the alternative scenarios could be summarized and included in the public release.
In our final post tomorrow, we explore how the SEP might be adapted to make it more useful …
[1] While the first two committees include external as well as internal members (three and two at the RBNZ and Norges Bank, respectively), the external members are typically researchers at domestic universities who bring academic expertise to the policy table. The Bank of England’s nine-member policy committee includes four external members from academia and the international financial community.
[2] In her presentation at the Thomas Laubach conference, Bank of England Deputy Governor Claire Lombardelli noted, “In the UK, our historical approach has been to publish a forecast that represents the best collective judgment of the Monetary Policy Committee” and that, in response to Bernanke’s report, the Bank will “move away from that to a forecast based on an initial staff proposal, that a majority of the Committee agree is a reasonable basis for discussions.” See https://www.bankofengland.co.uk/speech/2025/may/central-bank-communications-and-uncertainty-remarks-by-clare-lombardelli.
[3] The ECB’s Governing Council has twenty-six members who share eleven voting rights that rotate on a monthly basis.
[4] FOMC minutes from the October 2012 meeting at which the consensus forecast exercise was evaluated: https://www.federalreserve.gov/monetarypolicy/fomcminutes20121024.htm.
[5] Since 2017, most of the Fed’s Monetary Policy Reports prepared for Congress have included a box on policy rules, how they have performed, and how policymakers use them. See the June 2025 MPR: https://www.federalreserve.gov/monetarypolicy/2025-06-mpr-part2.htm.