On Wednesday, the Federal Reserve will publish its latest economic forecasts that will be released with the statement following the Federal Open Market Committee meeting. Investors will be intensely focusing on the Summary of Economic Projections for its estimates on GDP growth, the unemployment rate, inflation and the policy interest rate. This will very likely cause a market reaction; however, changing one's investment portfolio based on the Fed's projections is probably not a wise move.
Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth, has researched economic forecasts from the Federal Reserve and others for decades. He has advised against basing investment decisions on the Fed's predictions. In recent article, Swedroe considered the Fed's projection of interest rate increases for 2022 at the end of 2021 and found that the Federal Reserve actually raised the Fed funds rate seven times, ending the year with the target rate at 4.25%-4.50%, which was much higher than the Fed's estimation.
Swedroe believes the Fed was wrong due to mis-forecasting of inflation. This highlights the importance of being humble about forecasting and avoiding sudden changes in investments. Rather, one should have a long-term plan, stay invested and avoid market timing. The Federal Reserve, which sets the Fed funds rate, can be wrong in its predictions, meaning it is unlikely professional forecasters will be accurate in theirs.
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