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Making news: financial market effects of Federal Reserve disclosure practices

  • Antulio N. Bomfim
  • Vincent R. Reinhart

As recently as early 1994, market participants had to infer the stance of U.S. monetary policy according to the type and size of the open market operations conducted by the Federal Reserve's Trading Desk. Thus, investors were exposed to uncertainty about both the timing and the motivation for monetary policy actions. Since then, changes in disclosure practices regarding monetary policy decisions have potentially mitigated both types of uncertainty. We examine the effects of the greater openness and transparency of these new practices on the way a wide array of financial market instruments respond to unanticipated policy decisions. In general, the financial markets' response to policy does not seem to be related to what the Federal Reserve says after a surprise decision is announced or to when it decides to act. The invariance of the response of asset prices to policy across time and announcement regimes suggests that what the Federal Reserve says when it acts is of second-order importance to the act itself.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-14.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-14
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  1. Daniel L. Thornton, 1998. "Tests of the market's reaction to federal funds rate target changes," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 25-36.
  2. V. Vance Roley & Gordon H. Sellon, Jr., 1995. "Monetary policy actions and long-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-89.
  3. R.W. Hafer, 1986. "The response of stock prices to changes in weekly money and the discount rate," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 5-14.
  4. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  5. Daniel L. Thornton, 1982. "The discount rate and market interest rates: what's the connection?," Review, Federal Reserve Bank of St. Louis, issue Jun, pages 3-14.
  6. Cook, Timothy & Hahn, Thomas, 1987. "The Reaction of Interest Rates to Unanticipated Federal Reserve Actions and Statements: Implications for the Money Announcement Controversy," Economic Inquiry, Western Economic Association International, vol. 25(3), pages 511-34, July.
  7. Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.).
  8. Michael J. Dueker, 1992. "The response of market interest rates to discount rate changes," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 78-91.
  9. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  10. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
  11. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  12. Michael T. Belongia & Kevin L. Kliesen, 1994. "Effects On Interest Rates Of Immediately Releasing Fomc Directives," Contemporary Economic Policy, Western Economic Association International, vol. 12(4), pages 79-91, October.
  13. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May.
  14. Lombra, Raymond E & Torto, Raymond G, 1977. "Discount Rate Changes and Announcement Effects," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 171-76, February.
  15. Batten, Dallas S. & Thornton, Daniel L., 1984. "Discount rate changes and the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 279-292, December.
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