Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?

Yes. This paper shows that, since the late 1980s, U.S. financial markets and private sector forecasters have become (1) better able to forecast the federal funds rate at horizons out to several months, (2) less surprised by Federal Reserve announcements, (3) more certain of their interest rate forecasts ex ante, as measured by interest rate options, and (4) less diverse in the cross-sectional variety of their interest rate forecasts. We also present evidence that strongly suggests increases in Federal Reserve transparency played a role: for example, private sector forecasts of GDP and inflation have not experienced similar improvements over the same period, indicating that the improvement in interest rate forecasts has been special.