“I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so.”
On Friday, Janet Yellen gave a speech in Providence, Rhode Island and said that it will probably be appropriate for the Federal Reserve to raise interest rates this year.
This would be the first rate hike from the Fed since July 2006.
But as has been the case with comments from Yellen and other Federal Reserve officials all along, this language is carefully hedged and intentionally opaque.
So when Yellen says, “I can assure that any specific projection I write down will turn out to be wrong,” she is saying exactly why the Fed speaks this way. And also saying something you almost never hear an economist say: “I have no idea.”
Here’s the full passage from Yellen’s speech:
Putting it all together, the economic projections of most members of the FOMC call for growth in real gross domestic product of roughly 2-1/2 per cent per year over the next couple of years, a little faster than the pace of the recovery thus far, with the unemployment rate continuing to move down to near 5 per cent by the end of this year. And for inflation, as I noted earlier, my colleagues and I expect inflation to move up toward our objective of 2 per cent as the economy strengthens further and as transitory influences wane.
Of course, the outlook for the economy, as always, is highly uncertain. I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so. For many reasons, output and job growth over the next few years could prove to be stronger, and inflation higher, than I expect; correspondingly, employment could grow more slowly, and inflation could remain undesirably low.
Economic and financial forecasts are exercises in induction. That is, they take what happened in the past and on this basis project what will happen in the future. This process is about following trends, backtesting, tweaking models, and so on. And so often these projections turn out to be wrong, because, well, no one can know the future.
It isn’t often, however, that you hear an economist — let alone the chair of the Federal Reserve — admit that this is the case.
Following Yellen’s comments on Friday, markets were little changed as investors seemed to take Yellen’s forecast that rate hikes will likely happen this year in stride.
Of course, Yellen admitted that most of her forecasts will be wrong.
So who knows.