Lift-off Uncertainty: What Can We Infer From the FOMC’s Summary of Economic Projections?

Advisor: Carlos Viana de Carvalho

Co-advisor: Tiago Couto Berriel

What kind of information can we extract from the Summary of Economic Projections? We use two DSGE models subject to the Zero Lower Bound to answer two questions. First, we calibrate versions of these models under different assumptions about the degree of policy commitment, and assess which specification provides the best fit to the so-called “SEP dots”. We then use the best fitting specification for each model to construct uncertainty bands around interest rate forecasts to quantify the lift-off uncertainty. Our results suggest that the Federal Reserve has decreased its commitment degree in 2013 and, specially, in 2014. The reduction follows a change in the FOMC forward guidance statement, and increases with the Quantitative Easing tapering. As for uncertainty, our median projection indicates the lift-off will occur in 2015Q2, but there is some risk that rates will increase in 2015Q1 or remain at zero until the end of 2016.