Grumpy Economist: Interest Rate Survey


Torsten Slok passed on a lovely chart, which was created by Philadelphia Federal Reserve Survey Professional forecaster:

It’s not just the Federal Reserve, their own forecasts have the same characteristics as the dot plot.

Some potential lessons

1) Just waiting for you. There is a story of a depression patient. When he died at the age of 92, he wrote “Look, I told you I was sick” on his tombstone. More serious stories about the high interest rates of the 1980s have been told for a decade, and people are worried about inflation that may have occurred but never occurred. Or the famous “peso problem”, that is, the long-term low forward interest rate that proved to be correct.

2) The research on the “irrational” expectations revealed by the survey is very interesting. In asset pricing research, whether “professionals” are involved is usually used to choose between “rational” and “noisy” investors. Hello, professionals behave like the rest of us. The forecasts of Fed economists look the same. Arguments drawn from seemingly unreasonable investigations to get “experts” to run and move things have never been tenable.

3) What do survey forecasts mean? How many of these Wall Street economists or their trading departments are seriously shorting 10-year bonds? How many of them have lost money in this transaction for 20 consecutive years? To be sure, economists working for companies that are the opposite are a good choice… well, call it a trend, call it a bubble, call it the golden decade of long-term bonds. I believe that long-term bonds are about to take a bath, but in any case a large number of bonds have to be purchased, what is the story of the risk premium?

4) What do survey forecasts mean? We ask people “what do you expect?” and leave us confused. They will not answer with meaningful numbers as a measure of true conditions. The event of a sharp rise in interest rates may bring higher marginal utility, that is, a very bad event. For a variety of reasons, it may make sense to report a risk-neutral measure, probability multiplied by marginal utility. For a variety of reasons, it makes sense to report a 40% quantile (shaded as bad news). Customers who make money will not complain. Customers who lose money will do this.

5) What do survey forecasts mean? For most surveys, it is not the average value that is interesting but the surprising change around that average value. In theory, asset transactions should lead to common expectations. In fact, this is not the case. I would love to see the changes around this average forecast.

repent. I have always…well, not a forecast, but a doom and pessimism about the sharp rise in interest rates. Also, I must report that the graph has not changed my mind. In a sense, a person faces the problem of value investors. Every time the stock price drops, he has to say: “Now this is a better deal!” I think I have company. Look, I told you I’m sick?



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