Take the Fed forecast with a grain of salt. It has a terrible track record
Today, the Federal Reserve will publish its latest economic forecasts. There will be an intense focus on the Summary of Economic Projections, which is the Fed's own estimates for GDP growth, the unemployment rate, inflation and the appropriate policy interest rate.
The summary will be released as an addendum to the statement following Wednesday's Federal Open Market Commitee meeting.
Investors will carefully study these projections, and they will likely move the market.
But should you change your investment portfolio based on the Fed's projections? You probably should not.
Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth, for decades has studied economic forecasts of everyone from stock picking gurus to the Federal Reserve.
He has this piece of advice: don't base your investment decisions on what the Fed says. Or anyone else, for that matter.
Swedroe recently wrote an article where he looked at one simple metric: the Fed's effort to project its interest rate increases for 2022.
Swedroe noted that at the end of 2021, the Federal Reserve forecast that it would need to raise rates three times and that its policy target rate would end 2022 below 1%.
What actually happened? The Federal Reserve raised the Fed funds rate seven times in 2022, ending the year with the target rate at 4.25%-4.50%.
Federal Reserve: 2022 meetings
(rate hike each meeting)
What happened? How could the Fed have been so wrong? It simply misforecast the rate of inflation.
«One of the surprises, at least to the Fed, was that inflation turned out to be much higher than its forecast,» Swedroe wrote. «Its December 2021 forecast for 2022 inflation was for the core CPI to be between 2.5% and 3.0%. Inflation
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