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The FOMC's balance-of-risks statement and market expectations of policy actions

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  • Robert H. Rasche
  • Daniel L. Thornton

Abstract

In January 2000, the Federal Open Market Committee (FOMC) instituted the practice of issuing a “balance of risks” statement along with their policy decision immediately following each FOMC meeting. Robert H. Rasche and Daniel L. Thornton evaluate the use of the balance-of-risks statement and the market’s interpretation of it. They find that the balance-of-risks statement is one of the factors that market participants use to determine the likelihood that the FOMC will adjust its target for the federal funds rate at their next meeting. Moreover, they find that, on some occasions, the FOMC behaved in such a way as to encourage the use of the balance-of-risks statement for this purpose. The clarifying statements that sometimes accompany these balance-of-risks statements, as well as general remarks made by the Chairman and other FOMC members, often provide additional useful information.

Suggested Citation

  • Robert H. Rasche & Daniel L. Thornton, 2002. "The FOMC's balance-of-risks statement and market expectations of policy actions," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 37-50.
  • Handle: RePEc:fip:fedlrv:y:2002:i:sep:p:37-50:n:v.84no.5
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    References listed on IDEAS

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    1. William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 255-298, December.
    2. Daniel L. Thornton & David C. Wheelock, 2000. "A history of the asymmetric policy directive," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 1-16.
    3. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
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    Cited by:

    1. Jung, Alexander, 2016. "Have minutes helped to predict fed funds rate changes?," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 18-32.
    2. Nautz, Dieter & Schmidt, Sandra, 2009. "Monetary policy implementation and the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1274-1284, July.
    3. M.H. Middeldorp, 2011. "FOMC Communication Policy and the Accuracy of Fed Funds Futures," Working Papers 11-13, Utrecht School of Economics.
    4. Kevin Ross, 2002. "Market Predictability of ECB Policy Decisions; A Comparative Examination," IMF Working Papers 02/233, International Monetary Fund.
    5. Patricia S. Pollard, 2003. "A look inside two central banks: the European Central Bank and the Federal Reserve," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 11-30.
    6. Michael R. Pakko, 2005. "On the Information Content of Asymmetric FOMC Policy Statements: Evidence From a Taylor-Rule Perspective," Economic Inquiry, Western Economic Association International, vol. 43(3), pages 558-569, July.

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