Evaluating FOMC forecast ranges: an interval data approach

Abstract

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve publishes the range of members’ forecasts for key macroeconomic variables, but not the distribution of forecasts within this range. To evaluate these projections, previous papers compare the midpoint of the range with the realized outcome. This paper proposes a new approach to forecast evaluation that takes account of the interval nature of projections. It is shown that using the conventional Mincer-Zarnowitz approach to evaluate FOMC forecasts misses important information contained in the width of the forecast interval. This additional information plays a minor role at short forecast horizons but turns out to be of sometimes crucial importance for longer-horizon forecasts. For 18-month-ahead forecasts the variation of members’ projections contains information which is more relevant for explaining future inflation than information embodied in the midpoint. The midpoint also disqualifies as an unbiased forecast to be used on its own when considering longer-range forecast intervals for real GDP growth and the unemployment rate.