An Alternative Explanation for the “Fed Information Effect”

Michael Bauer and Eric T. Swanson

No 27013, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a “Fed information effect” channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. We show that these empirical results are also consistent with a “Fed response to news” channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. We provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, (i) regressions that include the previously omitted public economic news, (ii) a new survey that we conduct of Blue Chip forecasters, and (iii) high-frequency financial market responses to FOMC announcements all indicate that the Fed and private sector are simply responding to the same public news, and that there is little if any role for a “Fed information effect”.

JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (16)

Published as Michael D. Bauer & Eric T. Swanson, 2023. "An Alternative Explanation for the “Fed Information Effect”," American Economic Review, vol 113(3), pages 664-700.

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