Does FOMC Communication Help Predicting Federal Funds Target Rate Changes?

Bernd Hayo () and Matthias Neuenkirch ()

No 200925, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: We explain changes in the federal funds target rate using macroeconomic variables and Federal Open Market Committee (FOMC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 75 target rate decisions between 1998 and 2006. We find, first, that our communication indicators significantly explain target rate changes and improve explanatory power in and out of sample. Second, speeches by members of the Board of Governors and regional presidents have a statistically significant and equal-sized effect, whereas the less-frequent monetary policy reports and testimonies are insignificant. Third, our findings are robust to variations in the specification, including changes in the communication strategy as well as a measure of unambiguous communication. Finally, our communication indicator based on FOMC speeches performs better in explaining rate changes than do newswire reports of Fed communications.

Keywords: Central Bank Communication; Federal Reserve Bank; Interest Rate Decision; Monetary Policy; Federal Funds Target Rate; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:mar:magkse:200925

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