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Did I make myself clear? The Fed and the market under the 2020 monetary policy framework

Author

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  • Cieslak, Anna
  • McMahon, Michael
  • Pang, Hao

Abstract

We study the impact of the Federal Reserve’s communication on financial markets following the adoption of its revised policy framework in 2020. We propose a channel whereby market uncertainty stemming from perceived policy errors can raise risk premia. Post-framework communication introduced uncertainty about the Fed’s reaction function. Market concerns about policy mistakes amid incoming data drove up term premia, undermining easy financial conditions the Fed initially sought. While short-rate expectations were anchored by forward guidance, term premium sensitivity to inflation news increased. The subsequent shift in Fed's words and eventual actions helped stabilize premia, mitigating adverse macroeconomic news.

Suggested Citation

  • Cieslak, Anna & McMahon, Michael & Pang, Hao, 2024. "Did I make myself clear? The Fed and the market under the 2020 monetary policy framework," CEPR Discussion Papers 19360, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19360
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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