The FOMC’s New Individual Economic Projections and Macroeconomic Theories

Abstract

This paper examines whether the individual economic projections made by the Federal Open Market Committee’s (FOMC) policymakers are consistent with macroeconomic theories: Okun’s law, the Phillips curve, and the Taylor rule. By analyzing the FOMC’s individual economic projections between 2007 and 2014, I find that they are consistent with Okun’s law, revealing a significantly negative relationship between unemployment and output growth projections. On the other hand, the relationship between inflation and unemployment projections associated with the Phillips curve is much weaker and more dispersed. The results on the FOMC’s reaction function, the Taylor rule, are mixed: The response of the projections of the federal funds rate against the inflation gap projections—the deviation of inflation projections from the target—is significantly positive, whereas the response against the corresponding output gap projections varies depending on the specification.