Did I make myself clear? The Fed and the market under the 2020 monetary policy framework

Anna Cieslak, Michael McMahon and Hao Pang

No 19360, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the impact of the Federal Reserve’s communication on financial markets following the adoption of its revised policy framework in 2020. We propose a channel whereby market uncertainty stemming from perceived policy errors can raise risk premia. Post-framework communication introduced uncertainty about the Fed’s reaction function. Market concerns about policy mistakes amid incoming data drove up term premia, undermining easy financial conditions the Fed initially sought. While short-rate expectations were anchored by forward guidance, term premium sensitivity to inflation news increased. The subsequent shift in Fed's words and eventual actions helped stabilize premia, mitigating adverse macroeconomic news.

Keywords: Federal Reserve; Monetary policy; bond market (search for similar items in EconPapers)
JEL-codes: E52 E61 G12 (search for similar items in EconPapers)
Date: 2024-08
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