IDEAS home Printed from
   My bibliography  Save this paper

The effects of policy guidance on perceptions of the Fed’s reaction function


  • Katherine Femia
  • Steven Friedman
  • Brian P. Sack


In the past few years, the Federal Open Market Committee (FOMC) has been using forward guidance about the federal funds rate in a more explicit way than ever before. This paper explores the market reaction to the forward guidance, with particular focus on the use of calendar dates and economic thresholds in the FOMC statement. The results show that market participants interpreted the FOMC’s policy guidance as conveying important information about the Committee’s policy reaction function. In particular, market participants came to expect the FOMC to wait for lower levels of unemployment for a given level of inflation before beginning to raise the target federal funds rate, thereby shifting to a more accommodative policy approach aimed at supporting the economic recovery.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fednsr:652

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
    2. Ellen Correia Golay & Steven Friedman & Michael McMorrow, 2013. "Understanding the New York Fed's Survey of Primary Dealers," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 19(Aug).
    3. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    4. Gauti B. Eggertsson & Michael Woodford, 2006. "Optimal Monetary and Fiscal Policy in a Liquidity Trap," NBER Chapters,in: NBER International Seminar on Macroeconomics 2004, pages 75-144 National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)


    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. The Federal Reserve: Looking Back, Looking Forward
      by Guest Author in The Big Picture on 2014-01-04 16:00:00


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. King, Thomas B., 2016. "Expectation and Duration at the Effective Lower Bound," Working Paper Series WP-2016-21, Federal Reserve Bank of Chicago.
    2. repec:bla:jecsur:v:31:y:2017:i:3:p:678-711 is not listed on IDEAS
    3. 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.
    4. Aldy, Joseph E., 2017. "Designing and Updating a US Carbon Tax in an Uncertain World," Discussion Papers dp-17-01, Resources For the Future.
    5. Mohajeryami, Saeed, 2015. "Forecasting Feds Fund Rate: 1982-2014," MPRA Paper 67142, University Library of Munich, Germany.
    6. Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2016. "Forward guidance with an escape clause: when half a promise is better than a full one," Applied Economics, Taylor & Francis Journals, vol. 48(15), pages 1372-1381, March.
    7. Richhild Moessner & David-Jan Jansen & Jakob de Haan, 2017. "Communication About Future Policy Rates In Theory And Practice: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 678-711, July.
    8. Cole, Stephen, 2015. "Learning and the effectiveness of central bank forward guidance," MPRA Paper 65207, University Library of Munich, Germany.
    9. Bernanke, Ben S., 2014. "The Federal Reserve: Looking Back, Looking Forward : a speech at the Annual Meeting of the American Economic Association, Philadelphia, Pennsylvania, January 3, 2014," Speech 792, Board of Governors of the Federal Reserve System (U.S.).
    10. 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.).
    11. Karyne B. Charbonneau & Lori Rennison, 2015. "Forward Guidance at the Effective Lower Bound: International Experience," Discussion Papers 15-15, Bank of Canada.

    More about this item


    Federal Open Market Committee ; Monetary policy ; Federal funds rate ; Economic conditions;

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:fip:fednsr:652. 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: (Amy Farber). General contact details of provider: .

    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.