The Federal Reserve is currently trappedBaitandtacklenearmeThere is a model of forecasting and communicating with the public, which seems to be more and more limited, especially in the face of constant economic surprises. The problem is not the prediction itself-although it is often wrong. Rather, the problem is that in an economy still experiencing post-pandemic shocks, the focus on core forecasts-such as three interest rate cuts in 2024-does not fully convey the scope of possible outcomes. At a time when inflation is sticky, the interest rate outlook proposed by the Fed last month now looks out of date.

Another approach that is beginning to be popular is situational analysis (scenario analysis), which involves highlighting a range of credible risks to baselines and how central banks are likely to respond. This approach is particularly useful in times of high economic uncertainty. "there is an urgent need for the Fed to incorporate scenario analysis into its public communication," said Andrew Levin, a Dartmouth College professor and former senior adviser to Ben Bernanke, the Fed chairman.BaitandtacklenearmeHe described it as a "stress test of monetary policy".

Bernanke made a similar point a few days ago. In a report released this month for the Bank of England, he recommended that the Bank of England make more use of scenario analysis. It is reported that since last year, the Riksbank has been using scenario analysis on a regular basis, which it believes is "very important for policy communication". Mr Bernanke said the Bank of England should release other possible scenarios along with its core forecasts, which "will help the public better understand the reasons for choosing policies".

In March, the Federal Reserve sharply raised its economic growth forecast for 2024 by 0. 5%.Baitandtacklenearme.7 percent, and three interest rate cuts are expected this year. However, higher-than-expected inflation data quickly made such expectations obsolete, at least in financial markets. Investors have cut their expectations for the number of interest rate cuts by the Federal Reserve this year. The options market expects about 50% of the chances that the Fed will cut interest rates once or less.

The Fed's economic forecasts bring together the views of 19 policy makers on the path of economic growth, unemployment, inflation and potential interest rates. Designed and intended, the Fed focuses the attention of investors and analysts on the median interest rate expectations. But at a time when the economy is highly unpredictable, a comprehensive point of view is even more important.

Ira Jersey, chief US interest rate strategist at Bloomberg Intelligence, said that knowing how policymakers might adjust the interest rate path in an "overheated economy" scenario "any change in these prospects will lead to more volatility". "understanding how the Fed is hindering this potential outcome may provide valuable information."

Nine of the 19 policymakers expect interest rates to be cut twice or less this year, according to a bitmap released by the Fed in March. With the release of the latest inflation data, this view suddenly becomes more plausible. Federal Reserve Chairman Colin Powell has always stressed that the Fed's final decision on interest rates will depend on the data, but he has preferred to cut interest rates this year.

Fed economists do predict scenarios for policy makers, but the data are model-driven, do not reflect the expected response that the MPC will agree on, and are irrelevant from a communication point of view. because they weren't released until five years later.

Fed policymakers can start communicating the risks of alternative paths in several ways. The New York Fed has asked Wall Street traders to calculate the probability of different results in year-end policy rates. If Fed policymakers do the same, investors may think that the chances of not cutting interest rates in 2024 are greater than zero.

Investment company Deloitte Group (DBaitandtacklenearmeKris Dawsey, director of economic research at E. Shaw Group), said: "from their point of view, the communication baseline results may be more concise. The question is what is the most helpful thing. There is a feeling that it is costly to change the way they communicate on the interest rate path too suddenly. "

"policymakers are developing a single policy path," said Ellen Meade, a professor at Duke University and a former Fed governor. They need a model to look ahead, which is an unavoidable fact. " "once they have mastered this, situational analysis can well discuss with the public the fact that the model path is not 100% or immutable, and what is the most prominent risk."

At least some current Fed officials do seem willing to accept it. Mestre, chairman of the Cleveland Federal Reserve, called himself a "fan" of situational analysis. Neel Kashkari, chairman of the Minneapolis Fed, published an article last year outlining two competing economic prospects and their hypothetical impact on interest rates.

When it comes to innovation in public communication practices, the Fed tends to move slowly. But Michael Feroli, chief US economist at JPMorgan, said Bernanke's assessment of the Bank of England could prompt people to think more about the possibilities and alternatives of talking more about the interest rate path. The timing can also be accidental. Fed officials will launch another policy framework review later this year after the Fed conducted its first such review in 2019 and 2020.