Reconsidering the Fed's Inflation Forecasting Advantage

Abstract

AbstractPrevious studies show the Fed has a forecast advantage over the private sector for inflation. We evaluate this advantage to determine how much of it results from the Fed's knowledge of future monetary policy. To do so, we develop two methods of equalizing the Fed's and private sector's information sets. We find that Fed forecasts do not encompass those of the private sector when the latter has knowledge of future monetary policy. Furthermore, we find that roughly 25% of the difference between the Fed's and the private sector's mean squared forecast error can be explained by monetary policy.