On the Information Content of Asymmetric Fomc Policy Statements: Evidence From a Taylor‐rule Perspective

Abstract

For over two decades, the FOMC has included in its policy decisions a statement of bias toward subsequent tightening or easing of policy. This article examines the predictive content of these statements in a Taylor-rule setting, finding that they convey useful information for forecasting changes in the federal funds rate target, even after controlling for policy responses to inflation and the output gap. Moreover, the evidence suggests that this asymmetry can be represented in terms of shifts to the parameters of the Taylor-rule equation, indicating a greater or lesser degree of responsiveness to information about inflation and output. (JEL E52, E58)

Do Federal Reserve communications help predict federal funds target rate decisions?

“…It turns out that the modeling describes very well whether rate hikes/cuts occur or not, but it largely fails to differentiate between small and large interest rate steps. This is also a problem in other studies (e.g., Jansen and de Haan, 2009 (Lapp and Pearce, 2000;Pakko, 2005) and our communication indicator. The residuals ε t are assumed to follow a standard normal distribution, which implies that the probabilities of the different outcomes can be written as:…”

“…There are only a few studies on the Fed, which we review first. Pakko (2005) finds that post-meeting statements convey useful information for forecasting changes in the federal funds rate target, even after controlling for policy responses to inflation and the output gap. Lapp and Pearce (2000) show that a bias in the statement accompanying Federal Reserve policy decisions significantly affects the probability that the target will be changed in the period between two meetings.…”

Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence

“…Interestingly, T-bill rates started anticipating the Fed's next rate move on the day of Chairman Greenspan's testimony before the US Senate (day 11 in the chart). A number of recent papers apply Pakko's (2005) Rosa and Verga (2007) and Friedrich Heinemann and Karin Ullrich (2007) find that the press conferences do.…”

U.S. Monetary Policy Surprises and International Securitized Real Estate Markets

“…1 Extending earlier studies focusing on the federal funds rate as the main indicator of U.S. monetary policy (e.g., Kuttner 2001 andKuttner 2005), several recent studies have documented significant effects of unanticipated monetary policy surprises implied in FOMC statements on different asset markets, such as the stock market, bond market, and foreign exchange markets (Gurkaynak et al 2005;Hausman and Wongswan 2006;Wang et al 2006and Wongswan 2009). Essentially, clear communication in the FOMC statements can help increase the near-term predictability of FOMC federal funds rate decisions, as documented in Bernanke et al (2004) and Pakko (2005).…”