Message to Fed Chair: "Learn to Forecast"

Fed Chair Warsh's term has begun with some challenges, and it's still uncertain how he intends to handle monetary policy. Forecasting plays a vital role in effective policymaking, yet Mr. Warsh has not provided his forecast and does not support maintaining the practice of delivering quarterly forecasts.

Former Fed Chairman Mr. Greenspan was highly skilled in making monetary policy decisions, with one of his key strengths being his experience as a forecaster before becoming the Fed Chair. Mr. Greenspan dedicated countless hours to analyzing economic data and financial markets to understand future economic and financial trends. Although his forecasts were not always spot-on, they were accurate enough to allow him to guide monetary policy, often in a preemptive manner.

Forecasting is not easy; I know, as I did it for almost 40 years on Wall Street. Having worked at the Department of Commerce, I studied and learned the economic data, what was important for forecasting, and what was less so. Utilizing certain macro variables to set growth parameters was extremely beneficial, allowing the economy to "fill in the blanks" or composition of growth for each quarter. Every forecast needs to be cross -checked as much as possible, and it was always important to make sure what appeared to be occurring on the product side of the economy was also true on the income side (or jobs & wages, and profits).

The Bureau of Economic Analysis (BEA) once released a handbook of cyclical indicators, and one of my reliable indicators was "liquidity flows." I quickly realized that "money drives the economy." BEA no longer publishes this book, and the Fed stopped publishing data that was used to estimate liquidity flows.

One of Mr. Warsh's task force's tasks is to "evaluate new information sources and consider methodological changes to improve data gathering, with the aim of giving policymakers more accurate, relevant, contemporaneous, and, perhaps most important, actionable information on the state of our economy." This is a "nothing burger".

Today, the Fed and analysts possess ample government and private sector data, along with surveys, to make well-informed evaluations of current and future economic conditions. The Fed doesn't require additional data sources; instead, it needs to comprehend the existing data better and revive some of the crucial financial series it previously discontinued.

Mr. Warsh's critique of the Fed's economic projections is warranted. The Fed's forecasts consistently suggest that policymakers will meet their inflation mandate, if not in the upcoming year, then certainly within two years. However, policymakers should have recognized by this point that the economy and inflation operate independently of their predictions, making it crucial for them to comprehend the reasons why before policy errors happen.

The quicker Mr. Warsh "learns to forecast," the sooner he can make informed decisions regarding monetary policy.