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Anticipations of monetary policy in financial markets

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Author Info
Joe Lange
Brian Sack
William Whitesell
Abstract

In recent years, financial markets appear better able to anticipate FOMC policy changes. Beginning in the late 1980s and early 1990s, longer-term interest rates and futures rates have tended to incorporate movements in the federal funds rate several months in advance, in contrast to the largely contemporaneous response typically observed before that time. After identifying these emerging trends, the paper parses the enhanced predictability into a component that can be attributed to the autoregressive behavior of the funds rate and a non-autoregressive component. The paper considers institutional developments in FOMC policy making that may have contributed to each of these components, including gradualism in adjusting the federal funds rate target and transparency regarding the setting of the target and future policy intentions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-24.

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Date of creation: 2001
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Handle: RePEc:fip:fedgfe:2001-24

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Related research
Keywords: Financial markets ; Monetary policy ; Federal funds rate;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June. [Downloadable!] (restricted)
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  4. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. repec:fip:fedreq:y:1990:i:sep:p:3-26:n:v.76no.5 is not listed on IDEAS
  6. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December. [Downloadable!] (restricted)
  7. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
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  8. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 495-514, May. [Downloadable!] (restricted)
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  9. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation, Yale University. [Downloadable!]
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  10. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November. [Downloadable!] (restricted)
  11. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December. [Downloadable!] (restricted)
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  13. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York. [Downloadable!]
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  14. Antulio N. Bomfim & Vincent R. Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeff Moore & Richard Austin, 2002. "The behavior of federal funds futures prices over the monetary policy cycle," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 45-61. [Downloadable!]
  2. Ellis Connolly & Marion Kohler, 2004. "News and Interest Rate Expectations: A Study of Six Central Banks," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia. [Downloadable!]
    Other versions:
  3. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings, Federal Reserve Bank of Kansas City, pages 297-370. [Downloadable!]
    Other versions:
  4. Sophocles N. Brissimis & Nicholas S. Magginas, 2004. "Forward-Looking Information in VAR Models and the Price Puzzle," Working Papers 10, Bank of Greece. [Downloadable!]
    Other versions:
  5. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Banco de España Working Papers 0229, Banco de España. [Downloadable!]
    Other versions:
  6. J. Benson Durham, 2001. "The effect of monetary policy on monthly and quarterly stock market returns: cross-country evidence and sensitivity analyses," Finance and Economics Discussion Series 2001-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, International Atlantic Economic Society, vol. 31(4), pages 330-337, December. [Downloadable!] (restricted)
  8. Gordon H. Sellon, Jr., 2002. "The changing U.S. financial system : some implications for the monetary transmission mechanism," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-35. [Downloadable!]
  9. Junttila, Juha, 2002. "Forecasting the macroeconomy with current financial market information: Europe and the United States," Research Discussion Papers 2/2002, Bank of Finland. [Downloadable!]
  10. Bredin, Don & Gavin, Caroline & O'Reilly, Gerard, 2003. "The Influence of Domestic and International Interest Rates on the ISEQ," Research Technical Papers 9/RT/03, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
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  11. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Shu Wu, 2005. "Monetary Policy and Long-term Interest Rates," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200512, University of Kansas, Department of Economics, revised Apr 2005. [Downloadable!]
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