Do Monetary Policy Announcements Shift Household Expectations?

67 Pages Posted: 22 Oct 2019 Last revised: 29 Apr 2020

See all articles by Daniel J. Lewis

Daniel J. Lewis

Federal Reserve Banks - Federal Reserve Bank of New York

Christos Makridis

Stanford University; Columbia University - Columbia Business School; Arizona State University (ASU); Department of Veterans Affairs (VA)

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas; FRB Dallas

Date Written: September, 2019

Abstract

We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the Federal Funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings that suggest consumers are largely inattentive to economic developments. Monetary policy news about forward guidance and asset purchases does not have similarly clear and robust immediate effects on household beliefs. We document heterogeneity across demographics in the responsiveness of macroeconomic beliefs to aggregate news, and we relate our findings to existing evidence on informational rigidities.

Keywords: Monetary policy shocks, central bank communications, information rigidities, consumer confidence, high frequency identification

JEL Classification: E30, E40, E50, E70

Suggested Citation

Lewis, Daniel J. and Makridis, Christos and Mertens, Karel and Mertens, Karel, Do Monetary Policy Announcements Shift Household Expectations? (September, 2019). FRB of Dallas Working Paper No. 1906, Available at SSRN: https://ssrn.com/abstract=3473100 or http://dx.doi.org/10.24149/wp1906r1

Daniel J. Lewis (Contact Author)

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

33 Liberty Street
New York, NY 10045
United States

Christos Makridis

Stanford University ( email )

Stanford, CA 94305
United States

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
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Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Department of Veterans Affairs (VA) ( email )

810 Vermont Avenue NW
Washington, DC 20420
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Karel Mertens

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

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

FRB Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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