Fed scenarios 1968-2020: Value and limits for risk management
A new Federal Reserve paper documents 1,265 staff alternative scenarios presented to the FOMC from 1968 to 2020. The study reveals their evolution in frequency and sophistication, and assesses their value for central bank risk management.
Documenting five decades of scenario analysis
Federal Reserve staff documented 1,265 alternative scenarios presented to the Federal Open Market Committee (FOMC) between 1968 and 2020.
These scenarios, which grew in frequency and analytical sophistication over time, typically explored a range of outcomes around the baseline projection.
Researchers constructed a taxonomy with six categories: aggregate demand, aggregate supply, external risks, financial conditions, fiscal policy, and expectation shifts.
Staff qualitative risk assessments often complemented the scenario composition.
By comparing scenario forecasts to realized outcomes, the study reveals that the most accurate scenarios frequently anticipated major macroeconomic developments, even when the precise magnitudes were missed.
This highlights both the value and inherent limits of scenario analysis for central bank risk management.
From Gold Pool crisis to modern risk management
Alternative scenarios at the Federal Reserve originated in April 1968, initially driven by crises like the Gold Pool collapse.
They evolved into a regular feature of monetary policy analysis, growing in frequency and sophistication.
Early models included MIT-Penn-SSRC (MPS), later succeeded by FRB/US from 1996, which improved the treatment of expectations.
The 2010s saw increased use of New Keynesian DSGE models like SIGMA.
These scenarios illustrate how key risks might unfold, complementing the baseline forecast by highlighting vulnerabilities and potential trade-offs for policymakers.