Understanding the Aspects of Federal Reserve Forward Guidance

59 Pages Posted: 8 Nov 2018

See all articles by Kurt G. Lunsford

Kurt G. Lunsford

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: November 7, 2018

Abstract

This paper studies the effects of Federal Open Market Committee (FOMC) forward guidance language. I estimate two policy surprises at FOMC meetings: a change in the current federal funds rate and an orthogonal change in the expected path of the federal funds rate. From February 2000 to June 2003, the FOMC only gave forward guidance about risks to the economic outlook, and a surprise increase in the expected federal funds rate path had expansionary effects. This is consistent with models of central bank information effects, where a positive economic outlook causes private agents to revise up their expectations for the economy. From August 2003 to May 2006, the FOMC also gave forward guidance about policy inclinations, and a surprise increase in the federal funds rate path had contractionary effects. These results are consistent with standard macroeconomic models of forward guidance. Overall, the effects of forward guidance depend on the FOMC’s choice to use one or both of the economic-outlook and policy-inclination aspects of forward guidance.

Keywords: Central Bank Communication, Event Study, Federal Funds Futures, Information Effects, Monetary Policy

JEL Classification: E43, E44, E52, E58, G14

Suggested Citation

Lunsford, Kurt G., Understanding the Aspects of Federal Reserve Forward Guidance (November 7, 2018). FRB of Cleveland Working Paper No. 18-15. Available at SSRN: https://ssrn.com/abstract=3280584 or http://dx.doi.org/10.2139/ssrn.3280584

Kurt G. Lunsford (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
10
Abstract Views
99
PlumX Metrics