A Reassessment of Monetary Policy Surprises and High-Frequency Identification

Abstract

High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, we explain the predictability of the monetary policy surprises in terms of the "Fed response to news" channel of Bauer and Swanson ( 2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.

Interest Rate Skewness and Biased Beliefs

“…Our results show that high‐frequency rate changes around FOMC announcements are predictable with the information in conditional skewness, questioning their use as exogenous monetary policy surprises. Our findings are consistent with evidence on this type of predictability using information in macroeconomic and financial variables (Cieslak (2018), Bauer and Swanson (2023a, 2023b)).…”

“…Such monetary policy surprises are typically calculated from intraday changes in money market futures rates over a tight window around the FOMC announcements (Gürkaynak, Sack, and Swanson (2005)). Several recent papers find that these high‐frequency rate changes are predictable using publicly available macroeconomic data, possibly due to incomplete information of market participants about the Fed's implicit policy reaction function (Cieslak (2018), Bauer and Swanson (2023a, 2023b)). We study the predictability of monetary policy surprises using rate skewness, complementing the analysis in Section II.A as high‐frequency interest rate changes closely correspond to (negative) excess bond returns.…”

Business Cycles With Cyclical Returns to Scale

“…Given that our theoretical mechanism is centered on the complementarity between labor and energy, we compare the model impulse responses of labor and energy to monetary and fiscal policy shocks with the corresponding empirical impulse responses. To do so, we use the identified structural shocks in Romer and Romer (2004), Auerbach and Gorodnichenko (2012), Zubairy (2018), andBauer andSwanson (2022). We find that the theoretical responses in our benchmark model are largely consistent with the empirical responses.…”

Time-varying parameters in monetary policy rules: a GMM approach

“…Bianchi et al (2022) documented large shifts in the parameters of the US monetary policy rule over the past few decades and concluded that infrequent changes in the monetary stance can lead to persistent shifts in the real interest rate and asset valuations. Bauer and Swanson (2023) estimated a time-varying monetary policy rule for the Fed using weighted recursive least squares and found that the Fed's response to both the inflation and output gap has increased over the past 3 decades. Using a ML estimation method, G€ urkaynak et al (2023) provided evidence that weak monetary rules not satisfying the Taylor principle lead to outof-control inflation.…”