A Defense Of The Fomc

We defend the forecasting performance of the Federal Reserve Open Market Committee (FOMC) against the criticism of Christina and David Romer (2008, American Economic Review 98, 230-235) by assuming that the FOMC's forecasts depict a worst-case scenario that it uses to design decisions that are robust to misspecification of the staff's model. We use a simple macro model and a plausible loss function to illustrate how such an interpretation of the FOMC's forecasts can explain the findings of Romer and Romer, including the pattern of differences between FOMC forecasts and forecasts published by the staff of the Federal Reserve System in the Greenbook.