Anticipations of Monetary Policy in Financial Markets

Joe Lange · Brian Sack · William C. Whitesell

25 citations0/0 files storedFinance and Economics Discussion Series

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Market Dynamics and Volatility

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.

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References

1993Tests for Parameter Instability and Structural Change With Unknown Change Point 2001Monetary policy surprises and interest rates: Evidence from the Fed funds futures market 1991Yield Spreads and Interest Rate Movements: A Bird's Eye View 1999Optimal Monetary Policy Inertia 1984The information in the term structure 1989The effect of changes in the federal funds rate target on market interest rates in the 1970s 1983Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates 1986The Changing Behavior of the Term Structure of Interest Rates

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