A new framework to predict probability of monetary policy pivots: Part four
|Summary
The fourth installment of this series develops a new framework to quantify episodes of monetary policy pivots.
We also present a probit regression to predict the probability of a policy pivot during the next two quarters.
In our view, accurately predicting periods of monetary policy pivots is vital, as a rate cut that comes too late or too soon would be harmful to the economy and damage the FOMC’s reputation.
Our framework estimated that there are 26 episodes of policy pivots in the post-1990 period.
Using a threshold of 35%, the probit framework accurately predicted episodes of policy pivots in the post-1990 era.
The latest probability (Q2-2024) of 43% indicates that a rate cut cycle may start soon (within the next two quarters).
Given the historical accuracy of our framework, we believe the toolkit would provide useful insights for decision makers, as it can be updated in real time to gauge the likely duration of the upcoming easing cycle.
We believe accurately predicting the near-term path of the fed funds rate is vital for effective policymaking as well as policy communication. The next installment of the series will present a new approach to predict the fed funds rate two quarters out (up to four FOMC meetings ahead).
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