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The effects of policy guidance on perceptions of the Fed’s reaction function

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  • Katherine Femia
  • Steven Friedman
  • Brian Sack
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    Abstract

    In the past few years, the Federal Open Market Committee (FOMC) has been using forward guidance about the federal funds rate in a more explicit way than ever before. This paper explores the market reaction to the forward guidance, with particular focus on the use of calendar dates and economic thresholds in the FOMC statement. The results show that market participants interpreted the FOMC’s policy guidance as conveying important information about the Committee’s policy reaction function. In particular, market participants came to expect the FOMC to wait for lower levels of unemployment for a given level of inflation before beginning to raise the target federal funds rate, thereby shifting to a more accommodative policy approach aimed at supporting the economic recovery.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 652.

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    Date of creation: 2013
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    Handle: RePEc:fip:fednsr:652

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    Related research

    Keywords: Federal Open Market Committee ; Monetary policy ; Federal funds rate ; Economic conditions;

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    References

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    1. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
    2. Gauti Eggertsson & Michael Woodford, 2004. "Optimal monetary and fiscal policy in a liquidity trap," Discussion Papers 0405-02, Columbia University, Department of Economics.
    3. Ellen Correia Golay & Steven Friedman & Michael McMorrow, 2013. "Understanding the New York Fed's Survey of Primary Dealers," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 19(Aug).
    4. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Federal Reserve: Looking Back, Looking Forward
      by Guest Author in The Big Picture on 2014-01-04 10:00:00
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    Cited by:
    1. Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2014. "Forward guidance with an escape clause: When half a promise is better than a full one," Borradores de Economia 811, Banco de la Republica de Colombia.

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