Factors influencing Federal Reserve forecasts of inflation

Purpose - This study aims to both test the asymmetric information hypothesis and explore the factors influencing the one‐ through four‐quarter‐ahead Federal Reserve inflation forecasts for 1983‐2002. Design/methodology/approach - Encompassing tests are used to examine the asymmetric information hypothesis. In modeling the Federal Reserve inflation forecasts, the authors are mindful of alternative theories of inflation which emphasize such determinants as cost‐push, demand‐pull and inertial factors. Findings - First, the Federal Reserve inflation forecasts embody useful predictive information beyond that contained in the private forecasts. Second, with the private forecasts controlled for, the near‐term Federal Reserve inflation forecasts make use of qualitative information, and the longer‐term forecasts are influenced by the forecasts of growth in both unit labor costs and aggregate demand as well as the preceding‐quarter inflation forecasts and monetary policy shifts. Research limitations/implications - The Federal Reserve forecasts are released to the public with a five‐year lag and are currently available up to the fourth quarter of 2002. This limits the use of the most up‐to‐date forecasts desirable for this study. Originality/value - The factors influencing the Federal Reserve inflation forecasts are basically those emphasized publicly by monetary authorities. This finding points to the Fed's transparency and should thus help enhance its credibility with the public. Also, our results (which shed light on the predictive information in the Federal Reserve inflation forecasts not included in the private forecasts) are of value, since they can help the Fed better predict how inflation will respond to policy actions, and they can help the public form more informative inflationary expectations.