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Growth forecasts and news about monetary policy

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  • Karnaukh, Nina
  • Vokata, Petra

Abstract

We find that 30-minute changes in bond yields around scheduled Federal Open Market Committee (FOMC) announcements are predictable with the pre-FOMC Blue Chip professionals’ revisions in GDP growth forecasts. A positive pre-FOMC GDP growth revision predicts a contractionary policy news shock (positive change in bond yields), a negative GDP growth revision predicts an expansionary policy news shock (negative change in bond yields). Failing to account for this predictability biases the estimates of monetary policy effects on the economy. First, the Fed’s information effect dissipates as the truly unpredictable policy news shock does not affect professionals’ beliefs about the economy. Second, net policy shock has a more negative impact on actual future GDP than the raw policy shock.

Suggested Citation

  • Karnaukh, Nina & Vokata, Petra, 2022. "Growth forecasts and news about monetary policy," Journal of Financial Economics, Elsevier, vol. 146(1), pages 55-70.
    • Handle: RePEc:eee:jfinec:v:146:y:2022:i:1:p:55-70
    DOI: 10.1016/j.jfineco.2022.07.001
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    More about this item

    Keywords

    Monetary policy news; Growth forecasts; Federal funds futures; Predictability;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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