The Fed's response to economic news explains the "Fed information effect"

Michael Bauer and Eric Swanson

No 155, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

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. The authors 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. They provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, regressions that include the previously omitted public macroeconomic news, high-frequency stock market responses to Fed announcements, and a new survey that they conduct of individual Blue Chip forecasters 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".

Keywords: Federal Reserve; forecasts; survey; Blue Chip; Delphic forward guidance (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: The Fed's Response to Economic News Explains the "Fed Information Effect" (2020)
Working Paper: The Fed's Response to Economic News Explains the “Fed Information Effect” (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:155

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