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Understanding the Aspects of Federal Reserve Forward Guidance

Kurt Lunsford

No 1815, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper studies the effects of Federal Open Market Committee (FOMC) forward guidance language. I estimate two policy surprises at FOMC meetings: a change in the current federal funds rate and an orthogonal change in the expected path of the federal funds rate. From February 2000 to June 2003, the FOMC only gave forward guidance about risks to the economic outlook, and a surprise increase in the expected federal funds rate path had expansionary effects. This is consistent with models of central bank information effects, where a positive economic outlook causes private agents to revise up their expectations for the economy. From August 2003 to May 2006, the FOMC also gave forward guidance about policy inclinations, and a surprise increase in the federal funds rate path had contractionary effects. These results are consistent with standard macroeconomic models of forward guidance. Overall, the effects of forward guidance depend on the FOMC’s choice to use one or both of the economic-outlook and policy-inclination aspects of forward guidance.

Keywords: Central Bank Communication; Event Study; Federal Funds Futures; Information Effects; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-11-07
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DOI: 10.26509/frbc-wp-201815

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