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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, 2016 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 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 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 12month 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 𝜇1 𝐼𝑄𝑅1 Median across respondents: (𝜇𝐴 , 𝐼𝑄𝑅𝐴 ) 𝜇𝑛 𝐼𝑄𝑅𝑛 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 5.5 Some College BA or Higher 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 Cumulative Probability 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -2 -1 0 1 2 3 4 3-Year Ahead Expected Inflation Rate (%) Three-Year Inflation Expectations Repeat Respondents (Sept 2015 and Jan 2016) 5 6 7 8 Median September 2015 Median January 2016 Difference 2.98 2.45 -0.53 Slide 9 Point and Density Forecasts for the Policy Rate prob. per pctage point Year-End 2017 Target Federal Funds Rate/Range (December '15 Survey) PDF 0.7 prob. per pctage point Year-End 2017 Target Federal Funds Rate/Range (January '16 Survey) 0.6 Modal path 0.5 0.4 0.3 0.2 0.1 0 0.6 PDF PDF-implied Mean 0.6 prob. per Year-End 2017 Target Fed Funds pctage Rate/Range (March '16 Survey) point 0.5 PDF-implied Mean 0.5 0.4 Modal Path 0.4 PDF-implied Mean 0.3 0.3 Modal Path 0.2 0.2 0.1 0.1 0 0 1 2 3 4 5 Source: Desk Surveys prob. per pctage point 0 0 1 2 3 4 5 Source: Desk Surveys Year-End 2018 Target Federal Funds Rate/Range (December '15 Survey) prob. per pctage point 0.7 PDF 0.6 0.6 PDF-implied Mean Modal path 0.5 0.5 0.4 0.3 0.2 0.1 0 -1 1 Source: Desk Surveys 2 3 4 5 0 1 2 3 4 5 Source: Desk Surveys Year-End 2018 Target Federal Funds Rate/Range (January '16 Survey) prob. per Year-End 2018 Target Fed Funds pctage Rate/Range (March '16 Survey) point 0.6 PDF PDF 0.5 0.4 PDF-implied Mean 0.4 0.3 Modal Path 0.3 0.2 0.2 0.1 0.1 PDF-implied Mean Modal Path 0 0 0 PDF 0 1 Source: Desk Surveys 2 3 4 5 -1 0 1 2 3 4 5 Source: Desk Surveys Slide 10 Probability Distribution for Change in Year-end 2014 SOMA Portfolio relative to June 2013 Level prob. 60% 50% Change in SOMA Portfolio Size ($ billions) by YE 2014 Conditional on < 7.3% Unemployment at YE 2013 Conditional: Less than 7.3% prob. 60% Unconditional 50% 40% 40% 30% 30% 20% 20% 10% Change in SOMA Portfolio Size ($ billions) at YE 2014 Conditional on 7.3-7.5% Unemployment at YE 2013 Conditional: Between 7.3 and 7.5% Unconditional 10% 0% < -707 -707 to 207 -207 to 293 293 to 793 793 to 1293 0% 1293 > 1793 to 1793 < -707 -707 to 207 -207 to 293 293 to 793 793 to 1293 1293 > 1793 to 1793 Source: Survey of Primary Dealers Source: Survey of Primary Dealers prob. 60% Change in SOMA Portfolio Size ($ billions) at YE 2014 Conditional on > 7.5% Unemployment at YE 2013 Conditional: Greater than 7.5% Unconditional 50% 40% 30% 20% 10% 0% < -707 -707 to 207 -207 to 293 Source: Survey of Primary Dealers 293 to 793 793 to 1293 1293 > 1793 to 1793 Slide 11 Market-Implied Rates, Modal Paths, Risk Premia and PDF-Implied Mean Rates Market-Implied Federal Funds Rates % 3 Modal Path Estimates of Federal Funds Rates % YE 2016 2.5 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 3 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 Dec-15 Jan-16 Mar-16 Dec-15 Jan-16 Mar-16 Source: Bloomberg, Desk Calculations Source: Bloomberg Model Estimates of Federal Funds Risk Premia % 0 YE 2016 YE 2017 % 3 YE 2018 0 2.5 -0.2 2 -0.4 Survey PDF-Implied Mean Federal Funds Rates YE 2016 YE 2017 YE 2018 1.5 -0.6 1 -0.8 0.5 -1 0 -1.2 Dec-15 Jan-16 Source: Bloomberg, Desk Calculations Mar-16 Dec-15 Jan-16 Mar-16 Source: Desk Surveys Slide 12 Federal Funds Rate Survey Probability Distributions versus Tilted Distributions Year-End 2018 FF PDF (December Survey) prob. Year-End 2018 FF PDF (January Survey) 50% 40% 30% 20% 10% 0% -1 0 1 2 3 Federal Funds Rates (%) 4 5 -1 0 1 2 3 Federal Funds Rates (%) 4 5 Slide 13 KLIC Distributions Across Survey Respondents count Distance from Original Survey by Respondent (Year-End 2018) Distance from Original Survey by Respondent (Year-End 2018) count 35 35 30 30 January Survey March Survey 25 25 December Survey 20 20 15 15 10 10 5 5 0 0 0 0.5 1 1.5 December Survey 0 1 1.5 KLIC distance KLIC distance Source: Desk Surveys 0.5 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 12 March 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 count Modal Path Estimates for Year-end 2017 (March Survey) 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