Anticipation of Monetary Policy and Open Market Operations

Abstract

Central banking transparency is now a topic of great interest, but its impact on the implementation of monetary policy has not been studied. This paper documents that anticipated changes in the federal funds rate target complicate open market operations. We provide theoretical and empirical evidence on the behavior of banks and the Open Market Desk. We find a significant shift in demand for funds ahead of expected target rate changes and that the Desk only incompletely accommodates this shift in demand. This anticipation effect, however, does not materially affect other markets.

Keywords: Monetary Policy, Open Market Operations, Anticipation

JEL Classification: E5, E52, E58