The Advantages of Probabilistic Survey Questions IT Forum and RCEA Bayesian Workshop Keynote Address Simon M. Potter Federal Reserve Bank of New York May 19, 216 The views presented here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of New York, or the Federal Reserve System
Survey of Consumer Expectations A nationally representative, monthly internet-based survey of a rotating panel of ~ 1,3 household heads. Respondents on the panel for up 12 months. The survey has a core monthly module on expectations about macroeconomic and household level variables. Inflation, earnings growth, change in home prices and individual spending items, HH income growth, HH spending growth, taxes, government debt, credit access, job search. In addition, special monthly ad-hoc questions and annual surveys on special pics. Rotating ad-hocs: Credit access; Labor Market; Spending; Floating (insurance; ACA; Gas prices). Annual surveys: Housing; Labor Market; Saving and Assets. Slide 2
Elicitation of Probabilistic Beliefs In your view, what would you say is the percent chance that, over the 12- month period between May 218 May 219, the rate of inflation will be 12% or higher the rate of inflation will be between 8% and 12% the rate of inflation will be between 4% and 8% the rate of inflation will be between 2% and 4% the rate of inflation will be between % and 2% the rate of deflation will be between % and 2% the rate of deflation will be between 2% and 4% the rate of deflation will be between 4% and 8% the rate of deflation will be between 8% and 12% the rate of deflation will be 12% or more % Total Slide 3
Monthly Survey Public Release http://www.newyorkfed.org/microeconomics/sce/ Slide 4
Summarizing Density Forecasts μ 1 IQR 1 Median across respondents: (μ A, IQR A ) μ n IQR n Slide 5
Expected Three-Year Ahead Inflation Rate % Expected Three-Year Ahead Inflation Rate 4. 3.8 3.6 3.4 3.2 3. 2.8 2.6 2.4 2.2 2. Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Source: Survey of Consumer Expectations Slide 6
Expected Three-Year Ahead Inflation Rates, by Education % 5.5 Expected 3-Year Ahead Inflation Rates, by Education High School or Less Some College BA or Higher 5. 4.5 4. 3.5 3. 2.5 2. 1.5 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Source: Survey of Consumer Expectations Slide 7
Three-Year Ahead Inflation Uncertainty, by Education % 3-Year Ahead Inflation Uncertainty, by Education High School or Less Some College BA or Higher 6. 5.5 5. 4.5 4. 3.5 3. 2.5 2. 1.5 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Source: Survey of Consumer Expectations Slide 8
Cumulative Probability Three-Year Inflation Expectations Cumulative Probability Three-Year Inflation Expecations September 215 January 216 1.9.8.7.6.5.4.3.2.1-2 -1 1 2 3 4 5 6 7 8 3-Year Ahead Expected Inflation Rate (%) Three-Year Inflation Expectations Repeat Respondents (Sept 215 and Jan 216) Median September 215 Median January 216 Difference 2.98 2.45 -.53 Slide 9
Point and Density Forecasts for the Policy Rate prob. per pctage point.7.6.5.4.3.2.1 Year-End 217 Target Federal Funds Rate/Range (December '15 Survey) PDF PDF-implied Mean Modal path 1 2 3 4 5 prob. per pctage point.6.5.4.3.2.1 Year-End 217 Target Federal Funds Rate/Range (January '16 Survey) PDF PDF-implied Mean Modal Path 1 2 3 4 5 prob. per Year-End 217 Target Fed Funds pctage point Rate/Range (March '16 Survey).6 PDF.5.4.3.2.1-1 1 2 3 4 5 PDF-implied Mean Modal Path prob. per pctage point.7.6.5.4.3.2.1 Year-End 218 Target Federal Funds Rate/Range (December '15 Survey) PDF PDF-implied Mean Modal path 1 2 3 4 5 prob. per pctage point.6.5.4.3.2.1 Year-End 218 Target Federal Funds Rate/Range (January '16 Survey) PDF PDF-implied Mean Modal Path 1 2 3 4 5 prob. per Year-End 218 Target Fed Funds pctage point Rate/Range (March '16 Survey).6 PDF.5.4 PDF-implied Mean.3 Modal Path.2.1-1 1 2 3 4 5 Slide 1
Probability Distribution for Change in Year-end 214 SOMA Portfolio relative June 213 Level prob. 6% 5% 4% 3% 2% 1% % Change in SOMA Portfolio Size ($ billions) by YE 214 Conditional on < 7.3% Unemployment at YE 213 Conditional: Less than 7.3% < -77-77 27-27 293 Source: Survey of Primary Dealers 293 793 793 1293 Unconditional 1293 1793 > 1793 prob. 6% 5% 4% 3% 2% 1% % Change in SOMA Portfolio Size ($ billions) at YE 214 Conditional on 7.3-7.5% Unemployment at YE 213 Conditional: Between 7.3 and 7.5% < -77-77 27-27 293 Source: Survey of Primary Dealers 293 793 793 1293 Unconditional 1293 1793 > 1793 prob. 6% 5% 4% 3% 2% 1% Change in SOMA Portfolio Size ($ billions) at YE 214 Conditional on > 7.5% Unemployment at YE 213 Conditional: Greater than 7.5% Unconditional % < -77-77 27-27 293 293 793 793 1293 1293 1793 > 1793 Source: Survey of Primary Dealers Slide 11
Market-Implied Rates, Modal Paths, Risk Premia and PDF-Implied Mean Rates % Market-Implied Federal Funds Rates 3 2.5 YE 216 YE 217 YE 218 2 1.5 1.5 Dec-15 Jan-16 Mar-16 Source: Bloomberg % 3 2.5 2 1.5 1.5 Modal Path Estimates of Federal Funds Rates YE 216 YE 217 YE 218 Dec-15 Jan-16 Mar-16 Source: Bloomberg, Desk Calculations % Model Estimates of Federal Funds Risk Premia YE 216 YE 217 YE 218 % 3 2.5 Survey PDF-Implied Mean Federal Funds Rates YE 216 YE 217 YE 218 -.2 -.4 -.6 -.8-1 -1.2 Dec-15 Jan-16 Mar-16 Source: Bloomberg, Desk Calculations 2 1.5 1.5 Dec-15 Jan-16 Mar-16 Slide 12
Federal Funds Rate Survey Probability Distributions versus Tilted Distributions prob. 5% Year-End 218 FF PDF (December Survey) Year-End 218 FF PDF (January Survey) 4% 3% 2% 1% % -1 1 2 3 4 5 Federal Funds Rates (%) -1 1 2 3 4 5 Federal Funds Rates (%) Slide 13
KLIC Distributions Across Survey Respondents count 35 Distance from Original Survey by Respondent (Year-End 218) count 35 Distance from Original Survey by Respondent (Year-End 218) 3 25 2 January Survey December Survey 3 25 2 March Survey December Survey 15 15 1 1 5 5.5 1 1.5 KLIC distance.5 1 1.5 KLIC distance Slide 14
Distribution of Probability of Returning ZLB Across Survey Respondents Probability of Returning ZLB Dispersion Among Respondents count 12 January March 1 8 6 4 2 % 5% 1% 15% 2% 25% 3% 35% 4% 45% 5% Slide 15
Individual Density Forecasts for Year-end 217 Federal Funds Rate for March 216 Survey Respondents count 3 Modal Path Estimates for Year-end 217 (March Survey) 25 2 15 1 5 -.5.5 1 1.5 2 2.5 3 3.5 4 4.5 Slide 16