Policymakers' Uncertainty

74 Pages Posted: 11 Oct 2021 Last revised: 1 Nov 2023

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Stephen Hansen

University College London - Department of Economics

Michael McMahon

University of Oxford

Song Xiao

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: October 5, 2021

Abstract

Uncertainty is a ubiquitous concern emphasized by policymakers. We study how uncertainty affects decision-making by the Federal Open Market Committee (FOMC). We distinguish between the notion of Fed-managed uncertainty vis-a-vis uncertainty that emanates from within the economy and which the Fed takes as given. A simple theoretical framework illustrates how Fed-managed uncertainty introduces a wedge between the standard Taylor-type policy rule and the optimal decision. Using private Fed deliberations, we quantify the types of uncertainty the FOMC perceives and their effects on its policy stance. The FOMC's expressed inflation uncertainty strongly predicts a more hawkish policy stance that is not explained either by the Fed's macroeconomic forecasts or by public uncertainty proxies. We rationalize these results with a model of inflation tail risks and argue that the effect of uncertainty on the FOMC's decisions reflects policymakers' concern with maintaining credibility for the inflation anchor.

Keywords: uncertainty, monetary policy, Federal Reserve

JEL Classification: E52, E58

Suggested Citation

Cieslak, Anna and Hansen, Stephen and McMahon, Michael and Xiao, Song, Policymakers' Uncertainty (October 5, 2021). Available at SSRN: https://ssrn.com/abstract=3936999 or http://dx.doi.org/10.2139/ssrn.3936999

Anna Cieslak (Contact Author)

Duke University - Fuqua School of Business ( email )

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Stephen Hansen

University College London - Department of Economics ( email )

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Michael McMahon

University of Oxford ( email )

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Song Xiao

London School of Economics & Political Science (LSE) ( email )

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London, WC2A 2AE
United Kingdom

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