Anticipations of Monetary Policy in Financial Markets

38 Pages Posted: 14 Jul 2001

See all articles by Joe Lange

Joe Lange

Cornerstone Research

Brian P. Sack

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

William C. Whitesell

Federal Reserve Board - Division of Monetary Affairs

Date Written: May 2001

Abstract

In recent years, financial markets appear better able to anticipate FOMC policy changes. Beginning in the late 1980s and early 1990s, longer-term interest rates and futures rates have tended to incorporate movements in the federal funds rate several months in advance, in contrast to the largely contemporaneous response typically observed before that time. After identifying these emerging trends, the paper parses the enhanced predictability into a component that can be attributed to the autoregressive behavior of the funds rate and a non-autoregressive component. The paper considers institutional developments in FOMC policy making that may have contributed to each of these components, including gradualism in adjusting the federal funds rate target and transparency regarding the setting of the target and future policy intentions.

Keywords: term structure, policy expectations, funds rate, monetary policy

JEL Classification: E43, E52, E5

Suggested Citation

Lange, Joe and Sack, Brian P. and Whitesell, William C., Anticipations of Monetary Policy in Financial Markets (May 2001). FEDS Working Paper No. 2001-24, Available at SSRN: https://ssrn.com/abstract=274168 or http://dx.doi.org/10.2139/ssrn.274168

Joe Lange (Contact Author)

Cornerstone Research ( email )

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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)

William C. Whitesell

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Mailstop 72
Washington, DC 20551
United States
202-452-2967 (Phone)
202-452-3819 (Fax)

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