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The Determinants of Future U.S. Monetary Policy: High‐Frequency Evidence

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  • NICHOLAS TAYLOR

Abstract

This paper examines the determinants of future U.S. monetary policy by studying the relationship between a predictor of the future direction of monetary policy and a pertinent information set. Specifically, we investigate the impact of the surprise component of an array of macro‐economic announcements upon federal funds futures rates. This investigation is conducted using high‐frequency intraday data in order to examine the exact timing of rate reactions to announcements. In doing this, we find that Non‐farm Payrolls and Civilian Unemployment announcements play a dominant role in determining future monetary policy. Moreover, we document evidence that shows that the release of such information is rapidly incorporated into rates, particularly when considering federal funds futures contracts traded via an electronic trading platform (as opposed to an open‐auction trading platform).

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  • Nicholas Taylor, 2010. "The Determinants of Future U.S. Monetary Policy: High‐Frequency Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2‐3), pages 399-420, March.
    • Handle: RePEc:wly:jmoncb:v:42:y:2010:i:2-3:p:399-420
    DOI: 10.1111/j.1538-4616.2009.00292.x
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    1. Moura, Marcelo L. & Gaião, Rafael L., 2014. "Impact of macroeconomic surprises on the Brazilian yield curve and expected inflation," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 114-144.
    2. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
    3. Lapp, John S. & Pearce, Douglas K., 2012. "The impact of economic news on expected changes in monetary policy," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 362-379.
    4. James D. Hamilton & Seth Pruitt & Scott Borger, 2011. "Estimating the Market-Perceived Monetary Policy Rule," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 1-28, July.
    5. Michael D. Bauer, 2015. "Inflation Expectations and the News," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 1-40, March.
    6. Vijay A Murik, 2013. "Measuring monetary policy expectations," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 49-65, April.
    7. Dick van Dijk & Robin L. Lumsdaine & Michel van der Wel, 2014. "Market Set-Up in Advance of Federal Reserve Policy Decisions," NBER Working Papers 19814, National Bureau of Economic Research, Inc.
    8. Dunbar, Kwamie & Amin, Abu S., 2015. "The nature and impact of the market forecasting errors in the Federal funds futures market," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 174-192.
    9. Stotz, Olaf, 2018. "A labor news hedge portfolio and the cross-section of expected stock returns," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 123-139.

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