Federal Reserve Chairman Jerome Powell said the central bank must be willing to think beyond the complex mathematical simulations it traditionally uses to forecast the economy. „Intellectual rigor must be combined with flexibility and agility,” Powell said in opening remarks at a conference celebrating the 100th anniversary of the Fed’s research and statistics division.
„Even with sophisticated models and relatively calm periods, the economy often surprises us,” Powell said. „But our economy is flexible and dynamic, and sometimes subject to unpredictable shocks like a global financial crisis or a pandemic. At that point, forecasters have to think outside the models.”
The central bank chief did not comment on monetary policy or the outlook for the economy in his remarks.
R&S, known as the division, provides the Federal Open Market Committee — the Fed group that sets interest rates — with an economic forecast eight times a year, as well as updates on current data and research on policy and economic topics. The division is currently headed by Stacey Devlin, the first woman to head the division, which employs dozens of PhDs.
Forecasting has been a difficult exercise for central banks in the post-pandemic economy. Central bank staff called the burst of inflation „moderate” for most of 2021, before it continued to rise in 2022, reaching a peak annual rate of 7.1% in June of that year.
After a series of bank failures in March 2023, staff predicted a „mild recession” starting later in the year before ditching that call a few months later. The economy grew at its long-term trend rate of 2.1% annually. In the second quarter it rose to 4.9% in the third quarter.
Fed forecasters „do this job on the biggest stage and with the highest stakes, knowing that the economy often surprises us,” Powell said, adding that the job takes „a great deal of courage and humility.”
Officials will meet next on December 12-13 and look at fresh reports on retail sales, hiring and inflation ahead of the meeting. Futures markets see little chance of an interest-rate hike, and the current level of the central bank’s benchmark rate — 5.25% to 5.5% — would mark the peak of a tightening cycle.
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