Inside the Crystal Ball: How to Make and Use Forecasts

Chapter 6Four Gurus of EconomicsWhom to Follow?

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

—John Maynard Keynes, The General Theory of Employment, Interest, and Money (1936)

In forecasting, judgment is a necessary supplement to statistical techniques. But what factors should condition that judgment? In the field of economic forecasting, the selection of statistical models—and judgmental adjustments to their purely statistical prognostications—can reflect the forecaster's view of what makes the economy tick. For a forecaster, it is therefore important to recognize how one's overall ideas about the economy's workings can influence, and possibly bias, predictions. Forecast users, too, should consider whether their views on the determinants of economic activity are influencing their selection of the particular macroeconomic forecasts they use in their planning and projections.

In financial market forecasting, I have found it especially helpful to consider how those who participate in the markets think the economy functions—even when I disagree with their ideas. The challenge I faced in forecasting bond yields during the 2009 to 2014 period, when the Federal Reserve System was implementing its quantitative easing (QE) policy, provides a good example. The policy, which aimed to reliquefy the U.S. banking system and reduce Treasury note and bond yields and mortgage rates, entailed the ...