The United States Federal Reserve employs more PhD economists than any other institution; north of 400 at any one time.
The allure of predicting the future keeps us glued to what the Fed says and their view on the economy. Yet if history is any guide, we should ignore their predictions to just about everything they predict. Why do I say that?
Because an army of 400+ economists advising the Federal Reserve Governors doesn’t seem to help in predicting where the economy is going. Take a look at some comments and predictions from 3 different Federal Reserve Chairmen over the last several years.
February 2024: Jerome Powell admitted in an interview that the Fed had missed risk signals leading to the Silicon Valley Bank collapse.
What ended up happening: SVB failed in March 2023 due to unrealized losses on bonds amid rising rates, triggering a banking crisis and requiring federal intervention.
May 2022: Jerome Powell stated that a 75 basis-point interest rate hike was “not something the committee is actively considering.”
What ended up happening: Shortly after his renomination, the Fed implemented four consecutive 75 basis-point hikes starting in June 2022, leading to market volatility and the worst bond market performance in over a century.
June 2021: Jerome Powell testified before Congress that inflation pressures were “transitory” and expected to fade as supply bottlenecks eased. Jerome Powell downplayed rising inflation as temporary, delaying rate hikes.
What ended up happening: Inflation persisted and accelerated, peaking at 9.1% in June 2022, requiring aggressive rate hikes that contributed to economic strain and bank failures. The Fed’s slow response allowed inflation to become entrenched, necessitating steeper hikes later and prolonging economic pain.
March 2021: Jerome Powell indicated that interest rates would remain near zero for an extended period to support recovery.
What ended up happening: Rapid rate hikes beginning in 2022 devalued low-rate securities, contributing to the collapse of banks like Silicon Valley Bank in March 2023.
September 2018: Jerome Powell raised interest rates preemptively, citing concerns that strong economic growth under Trump would spark inflation.
What ended up happening: No significant inflation materialized from growth or tariffs; instead, the hikes caused a cash shortage in financial markets, necessitating a $500 billion bailout in fall 2019.
October 2008: Alan Greenspan admitted to Congress a “flaw” in his ideology that self-interest would protect markets without heavy regulation.
What ended up happening: The 2008 financial crisis unfolded as a “once-in-a-century credit tsunami,” exposing deregulation’s role in enabling risky behaviors that led to global recession.
April 2008: The Fed under Ben Bernanke forecasted the unemployment rate for Q4 2009 with a narrow confidence interval.
What ended up happening: Actual unemployment rose 4.4 percentage points higher than forecasted, equivalent to over 6 million more unemployed.
April 2008: The Fed under Ben Bernanke assessed low probability (less than 15%) of a deep recession.
What ended up happening: The Great Recession occurred with GDP declines comparable to depressions, far exceeding assessed risks.
October 2007: The Fed under Ben Bernanke forecasted 2.6% GDP growth for 2008.
What ended up happening: Actual GDP growth was -3.3%, a 5.9 percentage point error, as the recession deepened unexpectedly.
May 17, 2007: Ben Bernanke said troubles in the subprime sector were unlikely to seriously spill over to the broader economy.
What ended up happening: Subprime issues triggered the 2008 financial crisis and Great Recession, with GDP contracting sharply.
2002-2005: Alan Greenspan maintained that low interest rates did not contribute to a housing bubble, as long-term rates were influenced globally.
What ended up happening: Low rates fueled speculative housing investments, which helped lead to the 2007-2008 subprime crisis and Great Recession.
Never forget, the income of the Federal Reserve Chairman, the Board of Governors, and the staff at the Federal Reserve are not affected by how well they predict the future.
Planning is what matters, predictions don’t.
-Paul R. Rossi, CFA