{"id":15659,"date":"2017-07-31T19:19:53","date_gmt":"2017-07-31T23:19:53","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=15659"},"modified":"2017-07-31T19:19:53","modified_gmt":"2017-07-31T23:19:53","slug":"why-is-it-so-hard-to-forecast-interest-rates-san-francisco-fed","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2017\/07\/31\/why-is-it-so-hard-to-forecast-interest-rates-san-francisco-fed\/","title":{"rendered":"Why is it so hard to forecast interest rates? | San Francisco Fed"},"content":{"rendered":"<p>Interesting paper by Michael Bauer at the San Francisco Fed:<\/p>\n<blockquote><p>\n&#8230;.The difficulty of predicting changes in interest rates mainly arises from two features that characterize their evolution over time. First, like other financial variables, interest rates vary widely from day to day, which makes them difficult to link to economic fundamentals such as monetary or fiscal policy. This well-documented \u201cexcess volatility,\u201d was first pointed out in Shiller (1979), and it reflects the importance of frequent changes in investor sentiment due to a never-ending stream of economic data releases and other news.<\/p>\n<p>Second, as evident from 10-year Treasury yields since 1971, seen in Figure 1, interest rates have not fluctuated around a stable average level over this period. Instead of \u201cmean reversion\u201d around a constant average, they exhibit slow-moving trends, such as the rise during the \u201cGreat Inflation\u201d period of the 1970s, and the long-lasting decline since then.<\/p>\n<p><a href=\"http:\/\/www.frbsf.org\/economic-research\/publications\/economic-letter\/2017\/july\/bridging-gap-forecasting-interest-rates-with-macroeconomic-trends\/?utm_source=mailchimp&amp;utm_medium=email&amp;utm_campaign=economic-letter-2017-07-31\"><img data-recalc-dims=\"1\" decoding=\"async\" class=\"alignnone size-full\" src=\"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2017\/07\/2017-21-1.png?w=525&#038;ssl=1\" alt=\"\" \/><\/a><\/p>\n<p>&#8230;.the gap model does not assume that the level of the series will revert to some constant mean, but instead that the gap between the series and its trend component will revert to zero. Estimating trend components and gaps underlies most macroeconomic forecasting, and Faust and Wright (2013) recently demonstrated the gap model\u2019s excellent performance for inflation forecasting. <\/p>\n<p>&#8230;.Since inflation is ultimately determined by monetary policy, the long-run inflation trend corresponds to the perceived inflation target of the central bank. This can be estimated reasonably well from surveys. Figure 1 plots the publicly available and mostly survey-based inflation trend estimate (red line) that underlies the Federal Reserve Board\u2019s structural model of the U.S. economy, FRB\/US. For the trend in the real interest rate, also called the natural or equilibrium real interest rate, Laubach and Williams (2003) suggested a way to estimate it from macroeconomic data and popularized its use in policy analysis (see also Williams 2016). Figure 1 includes an estimate of the equilibrium real interest rate (green line) taken as the average of several popular estimates, as discussed in Bauer and Rudebusch (2017).<\/p>\n<p>Figure 1 also plots the sum of these two trends (red line); this estimate of the trend component in interest rates has exhibited a very pronounced decline since the 1980s. The 10-year yield generally fluctuated near this trend, and both are currently very low in historical comparison, with important consequences for policymaking (Williams 2016). Figure 1 suggests that it may be useful to take into account the level of the trend when forecasting interest rates.<\/p>\n<p>&#8230;.the final piece required for a practical forecast rule is an assumption about the transition of interest rates to their trend. Based on how quickly interest rates have historically reverted back to the trend, a reasonable assumption to make for this forecasting exercise is that 20% of the remaining gap is closed each quarter. But the precise speed of reversion to the trend is typically not crucial for forecasting performance (Faust and Wright 2013). Furthermore, it becomes essentially irrelevant for long-horizon forecasts, since forecasts are approximately equal to the estimated trend&#8230;..<\/p><\/blockquote>\n<p>Source: <a href=\"http:\/\/www.frbsf.org\/economic-research\/publications\/economic-letter\/2017\/july\/bridging-gap-forecasting-interest-rates-with-macroeconomic-trends\/\">Federal Reserve Bank of San Francisco |<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Interesting paper by Michael Bauer at the San Francisco Fed: &#8230;.The difficulty of predicting changes in interest rates mainly arises from two features that characterize their evolution over time. First, like other financial variables, interest rates vary widely from day to day, which makes them difficult to link to economic fundamentals such as monetary or &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2017\/07\/31\/why-is-it-so-hard-to-forecast-interest-rates-san-francisco-fed\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Why is it so hard to forecast interest rates? | San Francisco Fed&#8221;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,13,34],"tags":[],"class_list":["post-15659","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-inflation-economy","category-us-canada-countries-regions"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Why is it so hard to forecast interest rates? | San Francisco Fed - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why is it so hard to forecast interest rates? | San Francisco Fed - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Interesting paper by Michael Bauer at the San Francisco Fed: &#8230;.The difficulty of predicting changes in interest rates mainly arises from two features that characterize their evolution over time. 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Interest Rates The yield curve has flattened, indicating bond market expectations that the Fed will be forced to stop hiking rates soon. We are not so sure.\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Yield Curve","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-12-yieldcurve.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-12-yieldcurve.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-12-yieldcurve.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":19857,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/03\/03\/why-a-fed-rate-cut-will-not-save-us\/","url_meta":{"origin":15659,"position":1},"title":"Why a Fed rate cut will not save us","author":"Colin Twiggs","date":"March 3, 2020","format":false,"excerpt":"Why would the Fed cut interest rates? Unemployment is near record lows, as are initial jobless claims. While the consumer price index is not falling but rising. And the S&P 500 \u2014 which Donald Trump seems to view as part of the Fed's official mandate \u2014 is within 9% of\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":5631,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/10\/01\/bernanke-attempts-to-justify-screwing-savers\/","url_meta":{"origin":15659,"position":2},"title":"Bernanke attempts to justify screwing savers","author":"Colin Twiggs","date":"October 1, 2012","format":false,"excerpt":"This extract from Joe Weisenthal lauds Ben Bernanke's defense of monetary policy and its effect on savers. I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve's monetary policy, are in a larger sense the\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":23820,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/01\/23\/can-the-fed-keep-a-lid-on-inflation\/","url_meta":{"origin":15659,"position":3},"title":"Can the Fed keep a lid on inflation?","author":"Colin Twiggs","date":"January 23, 2021","format":false,"excerpt":"Jeremy Siegel, Wharton finance professor, says the Fed has poured a tremendous amount of money into the economy in response to the pandemic, which will eventually cause higher inflation. David Rosenberg of Rosenberg Research argues that velocity of money is declining and the US economy has a large output gap\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":20562,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/05\/21\/what-happened-to-gold-in-2013\/","url_meta":{"origin":15659,"position":4},"title":"What happened to Gold in 2013?","author":"Colin Twiggs","date":"May 21, 2020","format":false,"excerpt":"Gold peaked at the end of 2011, ending an eight-year bull run. Real interest rates bottomed a year later, in mid-2012, with the 10-year TIPS yield ending a dramatic fall from its highs in 2008. Gold completed a triple-top reversal, breaking primary support in April 2013, and the 10-year TIPS\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":33143,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/05\/19\/fed-swimming-against-the-tide\/","url_meta":{"origin":15659,"position":5},"title":"Fed swimming against the tide","author":"Colin Twiggs","date":"May 19, 2022","format":false,"excerpt":"The Fed continues its hawkish stance on inflation: \u201cWhat we need to see is inflation coming down in a clear and convincing way, and we\u2019re going to keep pushing until we see that. If that involves moving past broadly understood levels of \u2018neutral,\u2019 we won\u2019t hesitate at all to do\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"CPI & Fed Funds Rate","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-18-cpi-ffr.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-18-cpi-ffr.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-18-cpi-ffr.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-18-cpi-ffr.png?resize=700%2C400&ssl=1 2x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/15659","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=15659"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/15659\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=15659"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=15659"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=15659"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}