Embargoed for release: 12:15 p.m., Feb. 15, 2001
Contact: Joe Elstner, (314) 444-8902

Economic Forecasts: They're Important, but Uncertainties Abound, Says St. Louis Fed's Poole

Link to speech

LITTLE ROCK -- Economic forecasts are a valuable input to monetary policy, says Bill Poole. But, he adds quickly, "economic forecasts are subject to an inherent range of error, and it is critically important that consumers of forecasts understand this point."

Poole, president of the Federal Reserve Bank of St. Louis, made those points in a luncheon speech today to the Economic and Business Club of Little Rock.

Poole said he believes Gross Domestic Product (GDP) forecasts "should have an error band around them of about one percentage point for a forecast made at the beginning of a year. For inflation, the error band should be only a little smaller." Failure to understand such limits, he said, can cause problems for anyone acting on the basis of forecasts.

The St. Louis Fed president stressed that he is "not in the forecasting business." Instead, he said, he is a "consumer of forecasts." In explaining the wide range of forecasts produced by serious professional forecasters, he said the only reasonable assumption is that there is substantial room for significant differences of professional opinion.

To illustrate that range, Poole described aspects of the February Blue Chip forecasts. "Although the consensus forecast was 2.1 percent real GDP growth in 2001 over 2000, the average of the top ten was 2.8 percent real growth, and the bottom ten's average was 1.3 percent growth. The most optimistic of the 51 forecasts for 2001 was 3.6 percent real growth; the most pessimistic was 0.9 per cent growth."

Poole also noted that in January 2000, the Blue Chip consensus forecast for 2001 was 3.0 percent growth. That forecast reached a high of 3.5 percent in September, but by February 2001 had declined to 2.1 percent. "What should we conclude from this significant downward adjustment?" Poole asked. "For one thing, certainly one reason why you ought not to sell your portfolio, or mortgage your house to buy additional stock on the basis of economic forecasts is that these forecasts differ a lot from one forecaster to another," he said, "and change significantly over time, even over a couple of months. For another thing," he said, "let's recognize that forecasts are not now and have never been highly accurate."

In spite of forecasts' limited accuracy, Poole noted, professional forecasters do in fact forecast more accurately than other alternatives such as a "naïve" forecast of constant growth, or growth the same as last year, or other rules of thumb. "Forecasts are a valuable input to economic policy, provided consumers of forecasts like me understand their limitations," Poole said. Despite such limitations, Poole called the Blue Chip consensus forecast for 1 per cent first quarter 2001 growth, increasing to 3.5 percent growth by the fourth quarter "very heartening."

Poole said the Fed's main job is to keep the economy on a "sound long-run track. The Fed can't avoid most short-term fluctuations, but can help prevent those inevitable jolts from accumulating and pushing the economy far off its long-run growth track," he said.

Poole noted that Fed policy has been "extremely successful" in recent years in maintaining confidence that the inflation rate will remain low and stable well into the future. "This stable long-run outlook is what enables the markets to work through necessary short-term adjustments in constructive fashion," he said. "Market interest rates respond sensitively to current conditions and do much of the stabilization work. The Fed sets a stable, long-run environment within which the markets can make short-run adjustments in response to current developments."

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