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FOMC communication policy and the accuracy of Fed Funds futures

Author

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  • Menno Middeldorp
Abstract
Over the last two decades, the Federal Open Market Committee (FOMC), the rate-setting body of the United States Federal Reserve System, has become increasingly communicative and transparent. According to policymakers, one of the goals of this shift has been to improve monetary policy predictability. Previous academic research has found that the FOMC has indeed become more predictable. Here, I contribute to the literature in two ways. First, instead of simply looking at predictability before and after the Fed?s communication reforms in the 1990s, I identify three distinct periods of reform and measure their separate contributions. Second, I correct the interest rate forecasts embedded in fed funds futures contracts for risk premiums, in order to obtain a less biased measure of predictability. My results suggest that the communication reforms of the early 1990s and the ?guidance? provided from 2003 significantly improved predictability, while the release of the FOMC?s policy bias in 1999 had no measurable impact. Finally, I find that FOMC speeches and testimonies significantly lower short-term forecasting errors.

Suggested Citation

  • Menno Middeldorp, 2011. "FOMC communication policy and the accuracy of Fed Funds futures," Staff Reports 491, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:491
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Paul Hubert & Fabien Labondance, 2018. "The Effect of ECB Forward Guidance on the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 193-222, December.
    2. Dräger, L. & Lamla, M.J. & Pfajfar, D., 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," Other publications TiSEM 4d696071-8776-4191-a84f-f, Tilburg University, School of Economics and Management.
    3. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2016. "Are survey expectations theory-consistent? The role of central bank communication and news," European Economic Review, Elsevier, vol. 85(C), pages 84-111.
    4. Paul Hubert & Fabien Labondance, 2016. "The effect of ECB forward guidance on policy expectations," Documents de Travail de l'OFCE 2016-30, Observatoire Francais des Conjonctures Economiques (OFCE).
    5. repec:hal:spmain:info:hdl:2441/2g6qj1trtu8q2r79ee4jp49krd is not listed on IDEAS
    6. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
    7. Carlo Rosa, 2016. "Fedspeak: Who Moves U.S. Asset Prices?," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 223-261, December.
    8. repec:spo:wpmain:info:hdl:2441/61ma1iq1299m89uud61kkjcjot is not listed on IDEAS
    9. Bluhm, Marcel, 2015. "Investigating the monetary policy of central banks with assessment indicators," European Journal of Political Economy, Elsevier, vol. 38(C), pages 181-196.
    10. repec:spo:wpmain:info:hdl:2441/2g6qj1trtu8q2r79ee4jp49krd is not listed on IDEAS
    11. Jean-Yves Filbien & Fabien Labondance, 2012. "Reactions Des Marches D’Actions De La Zone Euro Aux Annonces Non Anticipees De La Bce," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(2), pages 179-204.
    12. repec:hal:spmain:info:hdl:2441/61ma1iq1299m89uud61kkjcjot is not listed on IDEAS
    13. Brett W. Fawley & Christopher J. Neely, 2014. "The evolution of Federal Reserve policy and the impact of monetary policy surprises on asset prices," Review, Federal Reserve Bank of St. Louis, vol. 96(1), pages 73-109.
    14. Dick van Dijk & Robin L. Lumsdaine & Michel van der Wel, 2014. "Market Set-Up in Advance of Federal Reserve Policy Decisions," NBER Working Papers 19814, National Bureau of Economic Research, Inc.

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    Keywords

    Forecasting; Federal Open Market Committee; Interest rates; Monetary policy; Disclosure of information; Federal funds;
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