EconExtra: Digging into the FOMC Data—What is the SEP?
The Summary of Economic Projections, or SEP, represents all of the FOMC participants’ projections for four key economic indicators as well as the Federal Funds Rate. Examining the SEP opens a window into what the participants are thinking as well as how that thinking changes over time. It is also a way to use current events for a statistics lesson.
EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons
Among the headlines this week following the Federal Open Market Committee meeting, press release, and press conference with Chair Powell, one key point was how much the projection for where the Federal Funds rate will end up this year (and next) increased since the last SEP in June. The year-end target increased from 3.4% in June to 4.4% in September. (Pensions and Investments) Jeanna Smialek, who covers the Fed for the New York Times, wrote an entire article explaining how to read the SEP. Her explanation of the “dot plot” of the Federal Funds projections is excellent. Her article is a good guide to what to look for when reading the projections. (If you watched the 9/21 press conference, she asked the first question.)
Background and Primary Resource
Every quarter, all of the FOMC participants (19) provide their forecasts for five economic indicators—GDP growth, the unemployment rate, PCE inflation, core PCE inflation, and the Federal Funds target rate.
If you enjoy statistics at all, you can have a field day with these projections. The actual SEP PDF contains good examples of many basic statistical measures and tools--median, measures of central tendency, ranges, dot plots, box and whisker plots, frequency distributions, and for the more advanced, confidence intervals. Here is a guide on what you will find where:
- Page 2: The summary data table displaying the median, central tendency (middle 50%) and range for the five economic indicators.
- Page 3: Here you will find line graphs of actual historical trends and box and whisker plots representing the data on page 2 for the first four indicators.
- Page 4: This is the famous “dot plot” of the Federal Funds projections that often gets a lot of press. (Pundits like to guess who the outliers are.)
- Pages 5-9: Each of these pages has the frequency distribution for each of the five indicators for each projected year, and includes the previous projection for a comparison.
- Pages 10-16: The rest of the document moves into risk assessment and confidence intervals for the projections as well as diffusion indexes. Below each chart you will find an explanation. Unless you are actually teaching a statistics class, you can skip these pages.
- Page 17: Here you will find a detailed explanation of forecast uncertainty. It is worth a read simply to get an idea of what the previous seven pages were trying to show. The last paragraph puts it in perspective, explaining that the dispersion of the participants’ projections is considerably smaller than the average forecast errors over the past twenty years.
If you want to make this a bit of a statistics lesson or refresher, you can start with Table 1 on page 2 and define median, central tendency, and range. Moving on to page 3, you can demonstrate how those measures are used to build the box and whisker plots.
Questions for page 3 (and 4):
Are there any indicators for which the participants’ projections are closer together or further apart? Do you notice anything about how disperse the projections are across time? Do they get further apart or closer together as you go out in time?
Questions for pages 5-9:
You can ask similar questions about the distributions of the projections based on these charts, as well as questions about how much some of these projections changed since June. Ask students what economic data releases over the summer may have influenced the change in projections (CPI/PCE).
For more on the Federal Reserve, check out the most recent EconExtra Activity based on the September 21 Powell Press Conference