FOMC Communication Policy and the Accuracy of Fed Funds Futures

M.H. Middeldorp

Research output: Working paperAcademic

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.
Original languageEnglish
Place of PublicationUtrecht
PublisherUU USE Tjalling C. Koopmans Research Institute
Number of pages21
Publication statusPublished - 2011

Publication series

NameDiscussion Paper Series / Tjalling C. Koopmans Research Institute
No.13
Volume11
ISSN (Electronic)2666-8238

Keywords

  • central bank communication
  • central bank transparency
  • futures pricing
  • financial market efficiency

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