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5 CHARTS: Fed Forecasters Flat-Out Wrong - fed forecast crystal ball

What do you call an economic forecasting outfit which continually calculates future economic growth and misses time and time again?



...Certainly not "credible."

Whichever derivative of "inaccurate" you choose to use, they all apply to the Federal Reserve's economic modeling. Incidentally, it's funny that Fed prognosticators came out so strongly in favor of future rate hikes yesterday when they seemingly have no clue whatsoever about the direction of the U.S. economy.

5 CHARTS: Fed Forecasters Flat-Out Wrong - Fed grasping cartoon 01.14.2015

Here are a few of the more shocking recent Fed governor comments that we simply couldn't ignore:

  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday) 

As Hedgeye CEO Keith McCullough pointed out in today's Early Look:

"Recently reported GDP of 0.5% isn’t in the area code of 'as expected.' I don’t think Williams has a lot of credibility as a Wall St. forecaster."

Meanwhile, Lockhart's Atlanta Fed updates its much-watched GDPNow estimate throughout the week. The measure seeks to project what recent data points mean for economic growth.

However, in the chart below, we show just how wrong that model has been over its lifespan (a.k.a. it has an intra-quarter standard error of 200-250 basis points!). Note: Our own GDP predictive tracking algorhythm has actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).

5 CHARTS: Fed Forecasters Flat-Out Wrong - atlanta fed post

That's why we're deeply skeptical of the most recent GDPNow reading of 1.8% for Q2 2016. (Note: Applying the aforementioned standard error means Q2 GDP could be between -0.7% and 4.3%!)

Outside the Atlanta Fed's challenged algorhythm, Hedgeye Senior Macro analyst Darius Dale has peeled back the onion on the Fed's official GDP projections. Unsurprisingly, these unelected bureaucrats are both incorrect and serial over-optimists:

5 CHARTS: Fed Forecasters Flat-Out Wrong - fed overoptimism

Similarly, back in October, we highlighted the absurdity of the Fed's forecasting in our 73-page Q4 Macro themes deck. Back then, the Fed was predicting the "longest economic expansion ever."

5 CHARTS: Fed Forecasters Flat-Out Wrong - CoD Fed Optimism

Now, You might be wondering...

Can't the Fed simply turn dovish like last week's "no April rate hike" soothsaying?

No. Investors betting on the direction of rates had pushed the next hike into December of 2017.

5 CHARTS: Fed Forecasters Flat-Out Wrong - Chart of the Day 4 20

So what happens when the Fed admits they are wrong about growth (and Hedgeye's economic predictions prove correct)?

Frankly, it will be too late for the Fed to save the day.

Here's the selloff that occured during the last two downturns.

5 CHARTS: Fed Forecasters Flat-Out Wrong - fed post drawdown

As we continually reiterate, the biggest risk to macro markets is believing in the Fed's serially overoptimistic economic projections.