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FOMC communication policy and the accuracy of Fed Funds futures

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  • Menno Middeldorp

Abstract

Over the last two decades, the Federal Open Market Committee (FOMC), the rate-setting body of the United States Federal Reserve System, has become increasingly communicative and transparent. According to policymakers, one of the goals of this shift has been to improve monetary policy predictability. Previous academic research has found that the FOMC has indeed become more predictable. Here, I contribute to the literature in two ways. First, instead of simply looking at predictability before and after the Fed?s communication reforms in the 1990s, I identify three distinct periods of reform and measure their separate contributions. Second, I correct the interest rate forecasts embedded in fed funds futures contracts for risk premiums, in order to obtain a less biased measure of predictability. My results suggest that the communication reforms of the early 1990s and the ?guidance? provided from 2003 significantly improved predictability, while the release of the FOMC?s policy bias in 1999 had no measurable impact. Finally, I find that FOMC speeches and testimonies significantly lower short-term forecasting errors.

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  • Menno Middeldorp, 2011. "FOMC communication policy and the accuracy of Fed Funds futures," Staff Reports 491, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:491
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    References listed on IDEAS

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    1. Clemens Kool & Menno Middeldorp & Stephanie Rosenkranz, 2011. "Central Bank Transparency and the Crowding Out of Private Information in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 765-774, June.
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    Cited by:

    1. Paul Hubert & Fabien Labondance, 2018. "The Effect of ECB Forward Guidance on the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 193-222, December.
    2. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2016. "Are survey expectations theory-consistent? The role of central bank communication and news," European Economic Review, Elsevier, vol. 85(C), pages 84-111.
    3. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
    4. Paul Hubert & Fabien Labondance, 2016. "The Effect of ECB Forward Guidance on Policy Expectations," Working Papers hal-01394821, HAL.
    5. Dräger, L. & Lamla, M.J. & Pfajfar, D., 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," Other publications TiSEM 4d696071-8776-4191-a84f-f, Tilburg University, School of Economics and Management.
    6. Jean-Yves Filbien & Fabien Labondance, 2012. "Reactions Des Marches D’Actions De La Zone Euro Aux Annonces Non Anticipees De La Bce," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(2), pages 179-204.
    7. Brett W. Fawley & Christopher J. Neely, 2014. "The evolution of Federal Reserve policy and the impact of monetary policy surprises on asset prices," Review, Federal Reserve Bank of St. Louis, vol. 96(1), pages 73-109.
    8. Dick van Dijk & Robin L. Lumsdaine & Michel van der Wel, 2014. "Market Set-Up in Advance of Federal Reserve Policy Decisions," NBER Working Papers 19814, National Bureau of Economic Research, Inc.
    9. Carlo Rosa, 2016. "Fedspeak: Who Moves U.S. Asset Prices?," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 223-261, December.
    10. Bluhm, Marcel, 2015. "Investigating the monetary policy of central banks with assessment indicators," European Journal of Political Economy, Elsevier, vol. 38(C), pages 181-196.

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    Keywords

    Forecasting; Federal Open Market Committee; Interest rates; Monetary policy; Disclosure of information; Federal funds;
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