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Connecting the dots: Market reactions to forecasts of policy rates and forward guidance provided by the Fed

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  • Michelle Bongard
  • Gabriele Galati
  • Richhild Moessner
  • William Nelson

Abstract

This paper compares market reactions to forecasts of the policy rate path by the Federal Open Market Committee (FOMC) participants with those to forward guidance from the FOMC post‐meeting statements. The forecasts are those by FOMC participants in the quarterly Summary of Economic Projections (SEP; the “dots”). We conduct the analysis during the period when the FOMC's policy rate was at the zero lower bound. We find that market expectations of the time to lift‐off from the zero lower bound are significantly affected in the expected direction by surprises in SEP dots and in forward guidance. We also find a significant impact of macroeconomic news on market participants' expectations of time to lift‐off. These results are consistent with forward guidance about policy rates and SEP forecasts each contributing to the public's understanding of future Federal Reserve monetary policy and with the conditionality of both forms of communication about future policy rates being understood. We also present evidence that market expectations concerning the time to lift‐off are influenced by the maximum time to lift‐off implied by forward guidance, the SEP, and the economic outlook. An appendix provides the FOMC's forward guidance after each meeting from January 2012 to September 2015 and our interpretation of the implied days to lift‐off.

Suggested Citation

  • Michelle Bongard & Gabriele Galati & Richhild Moessner & William Nelson, 2021. "Connecting the dots: Market reactions to forecasts of policy rates and forward guidance provided by the Fed," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 684-706, January.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:1:p:684-706
    DOI: 10.1002/ijfe.1811
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    References listed on IDEAS

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    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
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    Cited by:

    1. Carola Conces Binder & Rodrigo Sekkel, 2023. "Central Bank Forecasting: A Survey," Staff Working Papers 23-18, Bank of Canada.
    2. Gunda‐Alexandra Detmers & Ozer Karagedikli & Richhild Moessner, 2021. "Quantitative or Qualitative Forward Guidance: Does it Matter?," The Economic Record, The Economic Society of Australia, vol. 97(319), pages 491-503, December.

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