Superforecasting the Fed

You know you’re onto something when the world’s central banks start paying attention.

As recently reported by Bloomberg, researchers at the Federal Reserve Bank of New York are pioneering ways to apply Superforecasting® techniques in their work. It’s also a topic of discussion elsewhere in the Federal Reserve system.

Meanwhile, staffers at the Bank of England provided a tentative yes to the question posed in their blog post, “Can central bankers become Superforecasters?” Their chief economist recommends that central banks engage directly with the public via an online forecasting platform, which would “open central banks’ ears (and eyebrows) to a wider range of societal stakeholders when setting policy.”

As it happens, central bankers can already do so on Good Judgment Open in the “Finance Forecasting Challenge,” sponsored by CFA Societies in the U.S. and Canada. It’s open to all, including questions on Fed policy decisions, economic data, and asset class returns.

And there are the Superforecasters themselves, who shadow-forecast the Fed’s own predictions for key macroeconomic variables, including growth, inflation, and unemployment, as well as the federal funds rate itself. Earlier this year, the Superforecasters began to show a risk that inflation in 2019 would fall below the Fed’s expected inflation rate of 1.9% for the year, which would help set the stage for a shift by the Fed to start cutting interest rates again. Since then, the annual inflation rate has been averaging 1.4%.

On the eve of the Fed’s July meeting, the Superforecasters had a 98% probability of a rate cut, in line with most market observers at this point. Looking ahead, the Superforecasters also project at least a 20% probability of additional cuts at each of the next two meetings. Subscribers to Superforecaster® Analytics can monitor updates to these forecasts on a dedicated dashboard.

If you would like to see what the Superforecasters are saying about the rest of 2019 and 2020, please drop us a line and we’ll be happy to send the latest report.

You can also learn from the Superforecasters directly at upcoming public workshops in London, New York, and Chicago. Click here to find out how.

 

Superforecaster Perspectives on a “No-Deal” Brexit

Move over, NCAA. There’s a new March madness looming—the prospect that the UK will exit the European Union on 29 March without an agreement on the future UK-EU trading relationship.

A Wall Street Journal review of potential no-deal Brexit costs notes several eye-popping estimates, including:

  • A £13 billion ($17 billion) annual increase in costs for UK firms to fulfill customs declarations duties when exporting to the EU (HM Revenue & Customs);
  • A 5-8% long-term decrease in Britain’s GDP, coupled with a 1.5% decrease for EU member states (IMF); and
  • Tens of millions of pounds in additional tariffs for individual companies such as Burberry Group PLC, the British luxury fashion maker.

High uncertainty about the no-deal Brexit scenario drives massive planning expenses for contingencies that may never arise. Even small reductions in uncertainty could yield large payoffs.

Enter the Superforecasters—the “forecasting foxes” (hat-tip to David Brooks) who have an enviable track record of early foresight. Superforecasters typically start with a base rate that reflects the frequency with which comparable events have occurred. The question naturally arises: What is a “comparable” event to a no-deal Brexit?

One Superforecaster tackled this tough question by generating an intriguing array of possibilities limited to “Europe, broadly defined, in the last 30 years”:

  • “No exit”: separatist efforts in Catalonia’s recent attempt to leave Spain clearly failed, as did the 2014 Scottish independence referendum.
  • From former Yugoslavia:
    • Three “no-deal” departures (Bosnia, Croatia, and Kosovo);
    • Three “arranged” departures (Slovenia, Macedonia, and Montenegro); and
    • Two “remains” (Serbia and Vojvodina).
  • From the former Soviet Union:
    • Nine effectively “no-deal” departures that were messy, chaotic, and—to varying degrees—violent (Armenia, Azerbaijan, Estonia, Georgia, Latvia, Lithuania, Moldova, Tajikistan, and Ukraine);
    • Five “arranged” departures (Belarus, Kazakhstan, Kyrgyzstan, Turkmenistan, Uzbekistan); and
    • One “remain” (Russia).

Good Judgment’s professional Superforecasters routinely challenge one another to take an outside-view perspective on difficult-to-quantify uncertainties such as the prospect of a no-deal Brexit. Good Judgment’s new Future of Brexit package, about to be released, provides their latest probability forecasts on key questions such as “Before 1 January 2020, will the UK and the EU adopt an agreement on which customs territory Northern Ireland will be located in after the end of any Brexit transition period?” and includes highlights of Superforecaster commentary.

Contact us to learn more about the Future of Brexit package and other Superforecasts available by subscription or as custom forecasts on the questions that are most important to you.