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How Did Market Perceptions of the FOMC’s Reaction Function Change after the Fed’s Framework Review?

Author

Listed:
  • Ryan Bush
  • Haitham Jendoubi
  • Matthew Raskin
  • Giorgio Topa

Abstract

In late August, as part of the Federal Reserve’s review of Monetary Policy Strategy, Tools, and Communications, the Federal Open Market Committee (FOMC) published a revised Statement on Longer-Run Goals and Monetary Policy Strategy. As observers have noted, the revised statement incorporated important changes to the Federal Reserve’s approach to monetary policy. This includes emphasizing maximum employment as a broad-based and inclusive goal and focusing on “shortfalls” rather than “deviations” of employment from its maximum level. The statement also noted that, in order to anchor longer-term inflation expectations at the FOMC’s longer-run goal, the Committee would seek to achieve inflation that averages 2 percent over time. In this post, we investigate the possible impact of these changes on financial market participants’ expectations for policy rate outcomes, based on responses to the Survey of Primary Dealers (SPD) and Survey of Market Participants (SMP) conducted by the New York Fed’s Open Market Trading Desk both shortly before and after the conclusion of the framework review. We find that the conclusion of the framework review coincided with a notable shift in market participants’ perceptions of the FOMC’s policy rate “reaction function,” in the direction of higher expected inflation and lower expected unemployment at the time of the next increase in the federal funds target range (or “liftoff”).

Suggested Citation

  • Ryan Bush & Haitham Jendoubi & Matthew Raskin & Giorgio Topa, 2020. "How Did Market Perceptions of the FOMC’s Reaction Function Change after the Fed’s Framework Review?," Liberty Street Economics 20201218, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:89212
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    More about this item

    Keywords

    survey of primary dealers; survey of market participants;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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