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How farsighted is the FOMC?

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  • Geoffrey M. B. Tootell

Abstract

The most difficult problem facing monetary policymakers results from the long and variable lags in monetary policy's impact on the economy. The full effect of an interest rate change today is not realized for several quarters, so monetary policymakers must be forward-looking. Yet, it is difficult enough to interpret how the economy is doing now, let alone forecast how it will be performing one year hence. This uncertainty hinders the ability of policymakers to offset future fluctuations with current actions. Even so, the lags leave central bankers no choice but to react to their expectations about the future.> This article examines the extent to which the Federal Open Market Committee (FOMC) reacts to forward-looking data. It is shown that the FOMC does look into the future, basing its decisions on expectations about the economy at least as far as a year away. The effects of forecast uncertainty on the farsightedness of the FOMC are also analyzed. It is found that the FOMC's reaction depends on the relative uncertainty across forecast horizons, which can change over time.

Suggested Citation

  • Geoffrey M. B. Tootell, 1997. "How farsighted is the FOMC?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 49-65.
    • Handle: RePEc:fip:fedbne:y:1997:i:jan:p:49-65
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    Citations

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    Cited by:

    1. Peek, Joe & Rosengren, Eric S. & Tootell, Geoffrey M. B., 2003. "Does the federal reserve possess an exploitable informational advantage?," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 817-839, May.
    2. Geoffrey M. B. Tootell, 2000. "Reserve Banks, the Discount Rate Recommendation, and FOMC Policy," Southern Economic Journal, John Wiley & Sons, vol. 66(4), pages 957-975, April.
    3. Froyen, Richard T. & Waud, Roger N., 2002. "The determinants of Federal Reserve policy actions: A re-examination," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 413-428, September.
    4. Richard N. Cooper & Jane Sneddon Little, 2000. "U.S. monetary policy in an integrating world: 1960 to 2000," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 45(Oct), pages 77-121.
    5. John S. Lapp & Douglas K. Pearce & Surachit Laksanasut, 2003. "The Predictability of FOMC Decisions: Evidence from the Volcker and Greenspan Chairmanships," Southern Economic Journal, John Wiley & Sons, vol. 70(2), pages 312-327, October.
    6. Joe Peek & Eric Rosengren & Geoffrey M. B. Tootell, 1997. "Is banking supervision central to central banking?," Working Papers 97-3, Federal Reserve Bank of Boston.

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    Keywords

    Federal Open Market Committee;

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