IDEAS home Printed from https://ideas.repec.org/p/dnb/dnbwpp/523.html
   My bibliography  Save this paper

Connecting the dots: market reactions to forecasts of policy rates and forward guidance provided by the Fed

Author

Listed:
  • Michelle Bongard
  • Gabriele Galati
  • Richhild Moessner
  • William Nelson

Abstract

This paper compares market reactions to forecasts of the policy rate path provided by FOMC participants ("dots") in the Summary of Economic Projections (SEP) with those to forward guidance provided by the FOMC in its statements. We find that market expectations of the time to lift-off from the zero lower bound are significantly affected in the expected direction by surprises in SEP dots and in forward guidance. We also find a significant impact of macroeconomic news on market participants' expectations of time to lift-off. These results are consistent with forward guidance about policy rates and SEP forecasts each contributing to the public's understanding of future Federal Reserve monetary policy, and with the conditionality of both forms of communication about future policy rates being understood. We also present evidence that market expectations concerning the time to lift-off are influenced by the maximum time to lift-off implied by forward guidance, the SEP and the economic outlook. An appendix provides the FOMC's forward guidance after each meeting from January 2012 to September 2015 and our interpretation of the implied days to liftoff.

Suggested Citation

  • Michelle Bongard & Gabriele Galati & Richhild Moessner & William Nelson, 2016. "Connecting the dots: market reactions to forecasts of policy rates and forward guidance provided by the Fed," DNB Working Papers 523, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:523
    as

    Download full text from publisher

    File URL: https://www.dnb.nl/binaries/Working%20Paper%20523_tcm46-347505.PDF
    Download Restriction: no

    References listed on IDEAS

    as
    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    2. Del Negro, Marco & Giannoni, Marc & Patterson, Christina, 2012. "The forward guidance puzzle," Staff Reports 574, Federal Reserve Bank of New York, revised 01 Dec 2015.
    3. Richhild Moessner & William R. Nelson, 2008. "Central Bank Policy Rate Guidance and Financial Market Functioning," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 193-226, December.
    4. Richhild Moessner, 2014. "Effects of explicit FOMC policy-rate guidance on equities and risk measures," Applied Economics, Taylor & Francis Journals, vol. 46(18), pages 2139-2153, June.
    5. Laubach, Thomas & Williams, John C., 2015. "Measuring the natural rate of interest redux," Working Paper Series 2015-16, Federal Reserve Bank of San Francisco.
    6. Lars E.O. Svensson, 2015. "Day One Keynote Address: Forward Guidance," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 19-64, September.
    7. Richhild Moessner, 2015. "Reactions of real yields and inflation expectations to forward guidance in the United States," Applied Economics, Taylor & Francis Journals, vol. 47(26), pages 2671-2682, June.
    8. Christensen, Jens H.E. & Kwan, Simon H., 2014. "Assessing expectations of monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    9. Richhild Moessner & Jakob de Haan & David-Jan Jansen, 2016. "Effectiveness Of Monetary Policy In Sweden," Contemporary Economic Policy, Western Economic Association International, vol. 34(4), pages 698-709, October.
    10. Katherine Femia & Steven Friedman & Brian P. Sack, 2013. "The effects of policy guidance on perceptions of the Fed’s reaction function," Staff Reports 652, Federal Reserve Bank of New York.
    11. Lars E.O. Svensson, 2014. "Forward Guidance," NBER Working Papers 20796, National Bureau of Economic Research, Inc.
    12. Dudley, William, 2015. "Remarks at the 2015 U.S. Monetary Policy Forum," Speech 157, Federal Reserve Bank of New York.
    13. Richhild Moessner, 2013. "Effects of explicit FOMC policy rate guidance on market interest rates," DNB Working Papers 384, Netherlands Central Bank, Research Department.
    14. repec:pri:cepsud:161blinder is not listed on IDEAS
    15. Moessner, Richhild, 2013. "Effects of explicit FOMC policy rate guidance on interest rate expectations," Economics Letters, Elsevier, vol. 121(2), pages 170-173.
    16. Engen, Eric M. & Laubach, Thomas & Reifschneider, David L., 2015. "The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies," Finance and Economics Discussion Series 2015-5, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    forward guidance; policy rate forecasts; zero lower bound;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:523. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet). General contact details of provider: http://edirc.repec.org/data/dnbgvnl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.