The Effects of Policy Guidance on Perceptions of the Fed's Reaction Function

15 Pages Posted: 17 Nov 2013

See all articles by Katherine Femia

Katherine Femia

Federal Reserve Banks - Federal Reserve Bank of New York

Steven Friedman

Federal Reserve Banks - Federal Reserve Bank of New York

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Date Written: November 1, 2013

Abstract

In the past few years, the Federal Open Market Committee (FOMC) has been using forward guidance about the federal funds rate in a more explicit way than ever before. This paper explores the market reaction to the forward guidance, with particular focus on the use of calendar dates and economic thresholds in the FOMC statement. The results show that market participants interpreted the FOMC’s policy guidance as conveying important information about the Committee’s policy reaction function. In particular, market participants came to expect the FOMC to wait for lower levels of unemployment for a given level of inflation before beginning to raise the target federal funds rate, thereby shifting to a more accommodative policy approach aimed at supporting the economic recovery.

Keywords: monetary policy, forward guidance

JEL Classification: E52, E58

Suggested Citation

Femia, Katherine and Friedman, Steven and Sack, Brian P., The Effects of Policy Guidance on Perceptions of the Fed's Reaction Function (November 1, 2013). FRB of New York Staff Report No. 652. Available at SSRN: https://ssrn.com/abstract=2355136 or http://dx.doi.org/10.2139/ssrn.2355136

Katherine Femia (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Steven Friedman

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-736-5671 (Phone)
202-452-2301 (Fax)

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