The Advantages of Probabilistic Survey Questions IT Forum and RCEA Bayesian Workshop Keynote Address Simon M. Potter May 19, 2016 Federal Reserve Bank of New York 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 ~ 1,300 household heads. Respondents on the panel for up to 12 months. The survey has a core monthly module on expectations about macro- economic 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 topics. 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 2018 to May 2019, … 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 0% and 2% ______ the rate of deflation will be between 0% 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 𝜈 1 𝐽𝑅𝑆 1 Median across respondents: (𝜈 𝐵 , 𝐽𝑅𝑆 𝐵 ) 𝜈 𝑜 𝐽𝑅𝑆 𝑜 Slide 5
Expected Three-Year Ahead Inflation Rate Expected Three-Year Ahead Inflation Rate % 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 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 Expected 3-Year Ahead Inflation Rates, by Education % High School or Less Some College BA or Higher 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 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 % 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 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
Three-Year Inflation Expectations Cumulative Probability Three-Year Inflation Expecations September 2015 January 2016 1 0.9 0.8 Cumulative Probability 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -2 -1 0 1 2 3 4 5 6 7 8 3-Year Ahead Expected Inflation Rate (%) Three-Year Inflation Expectations Median Median Difference September January 2015 2016 Repeat Respondents 2.98 2.45 -0.53 (Sept 2015 and Jan 2016) Slide 9
Point and Density Forecasts for the Policy Rate prob. per Year-End 2017 Target Federal Funds prob. per Year-End 2017 Target Federal Funds Year-End 2017 Target Fed Funds prob. per pctage pctage Rate/Range (December '15 Survey) Rate/Range (January '16 Survey) pctage Rate/Range (March '16 Survey) point point point PDF 0.7 0.6 0.6 PDF PDF PDF-implied Mean 0.6 0.5 0.5 PDF-implied Mean Modal path PDF-implied 0.5 0.4 Modal Path 0.4 Mean 0.4 Modal Path 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0 0 0 0 1 2 3 4 5 0 1 2 3 4 5 -1 0 1 2 3 4 5 Source: Desk Surveys Source: Desk Surveys Source: Desk Surveys Year-End 2018 Target Fed Funds prob. per Year-End 2018 Target Federal Funds prob. per prob. per Year-End 2018 Target Federal Funds pctage pctage pctage Rate/Range (March '16 Survey) Rate/Range (December '15 Survey) Rate/Range (January '16 Survey) point point point PDF 0.6 0.7 0.6 PDF PDF 0.6 0.5 PDF-implied 0.5 PDF-implied PDF-implied Mean 0.5 0.4 0.4 Modal path Mean Mean 0.4 Modal Path Modal Path 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0 0 0 -1 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 Source: Desk Surveys Source: Desk Surveys Source: Desk Surveys Slide 10
Probability Distribution for Change in Year-end 2014 SOMA Portfolio relative to June 2013 Level Change in SOMA Portfolio Size ($ billions) Change in SOMA Portfolio Size ($ billions) at YE 2014 Conditional on 7.3-7.5% by YE 2014 Conditional on < 7.3% prob. prob. Unemployment at YE 2013 Unemployment at YE 2013 60% 60% Conditional: Less than 7.3% Unconditional Conditional: Between 7.3 and 7.5% Unconditional 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% < -707 -707 -207 293 793 1293 > 1793 < -707 -707 -207 293 793 1293 > 1793 to to to to to to to to to to 207 293 793 1293 1793 207 293 793 1293 1793 Source: Survey of Primary Dealers Source: Survey of Primary Dealers Change in SOMA Portfolio Size ($ billions) at YE 2014 Conditional on > 7.5% prob. Unemployment at YE 2013 60% Conditional: Greater than 7.5% Unconditional 50% 40% 30% 20% 10% 0% < -707 -707 -207 293 793 1293 > 1793 to to to to to 207 293 793 1293 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 Modal Path Estimates of Federal Funds % Rates 3 % YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 Dec-15 Jan-16 Mar-16 Dec-15 Jan-16 Mar-16 Source: Bloomberg Source: Bloomberg, Desk Calculations Survey PDF-Implied Mean Federal Funds Model Estimates of Federal Funds Risk % Rates Premia 3 % YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 0 2.5 -0.2 2 -0.4 1.5 -0.6 1 -0.8 0.5 -1 0 -1.2 Dec-15 Jan-16 Mar-16 Dec-15 Jan-16 Mar-16 Source: Desk Surveys Source: Bloomberg, Desk Calculations Slide 12
Federal Funds Rate Survey Probability Distributions versus Tilted Distributions Year-End 2018 FF PDF Year-End 2018 FF PDF prob. (December Survey) (January Survey) 50% 40% 30% 20% 10% 0% -1 0 1 2 3 4 5 -1 0 1 2 3 4 5 Federal Funds Rates (%) Federal Funds Rates (%) Slide 13
KLIC Distributions Across Survey Respondents Distance from Original Survey by Respondent Distance from Original Survey by Respondent (Year-End 2018) (Year-End 2018) count count 35 35 30 30 January Survey March Survey 25 25 December Survey December Survey 20 20 15 15 10 10 5 5 0 0 0 0.5 1 1.5 0 0.5 1 1.5 KLIC distance KLIC distance Source: Desk Surveys Source: Desk Surveys Slide 14
Distribution of Probability of Returning to ZLB Across Survey Respondents Probability of Returning to ZLB Dispersion Among Respondents count January March 12 10 8 6 4 2 0 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: Desk Surveys Slide 15
Individual Density Forecasts for Year-end 2017 Federal Funds Rate for March 2016 Survey Respondents Modal Path Estimates for Year-end 2017 (March Survey) count 30 25 20 15 10 5 0 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Source: Desk Surveys Slide 16
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