Data "Conflict"! Fed Economic Forecasts Show Huge Divergence, How It Affects Rate Cuts

With the Fed's September policy meeting approaching, and a rate cut almost certain, the update of the Quarterly Economic Outlook (SEP) will be in focus, as data revisions may influence the future path of policy. However, given that the impact of U.S. President Trump's trade policies has not yet fully materialized, recent economic data has become volatile. The forecasts from the three major regional Feds, based on their respective models, show greater divergence than before, which could add uncertainty to upcoming policy discussions.

The Fed currently has three regional banks that release "nowcasts" of GDP growth: the Atlanta Fed, the St. Louis Fed, and the New York Fed. The logic of "nowcasts" is to use real-time economic data to estimate the possible value of GDP in the current quarter.

Currently, the forecasts from these three Feds paint vastly different pictures of the economic situation. The Atlanta Fed's nowcast shows current economic growth as high as 3%, which even exceeds the expectations of all independent economic forecasting agencies. In contrast, the St. Louis Fed's model indicates that economic growth this quarter is only 0.6%—barely above the "stall speed," making it one of the more pessimistic forecasts. The New York Fed's nowcast falls between the two, at 2.1%.

Google's AI tool Gemini calculated that, two months into a quarter, the average difference in GDP growth forecasts among institutions is 0.3 percentage points, with a standard deviation of 1.6 percentage points. However, this value was significantly affected by volatility during the pandemic. If data from before and after the pandemic is excluded, the standard deviation of forecast differences is about 1 percentage point. This shows that the current gap between the Atlanta Fed and St. Louis Fed forecasts is more than twice the常规水平.

Admittedly, the two nowcasts use different calculation methods. The Atlanta Fed's model estimates each component of GDP based on the latest released data. In contrast, the St. Louis Fed's model adopts a "top-down" approach, incorporating data that is not included in GDP calculations but is valuable for estimating economic growth.

Data deviations are also related to the seemingly contradictory economic trends at present. For example, non-farm employment growth has slowed significantly, and real estate sales data is weak, but retail sales month-on-month, services PMI, and new consumer credit remain稳健.