The effects of policy guidance on perceptions of the Fed’s reaction function
AbstractIn 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 InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 652.
Date of creation: 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-MAC-2013-11-09 (Macroeconomics)
- NEP-MON-2013-11-09 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- The Federal Reserve: Looking Back, Looking Forward
by Guest Author in The Big Picture on 2014-01-04 10:00:00
- Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2014.
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