econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 19 October 2016

From The Vault: Does Forward Guidance Work?

from Liberty Street Economics

-- this post authored by Anna Snider

In recent months, there have been some high-profile assessments of how far the Federal Reserve has come in terms of communicating about monetary policy since its “secrets of the temple" days. While observers say the transition to greater transparency “still seems to be a work in progress," they note the range of steps the Fed has taken over the years to shed light on its strategy, including issuing statements to announce and explain policy changes following Federal Open Market Committee (FOMC) meetings, post-meeting press conferences and minutes, FOMC-member speeches and testimony, and “forward guidance" in all its variants.

The evolution to openness stems from a theoretical argument that central banks can enhance the effectiveness of monetary policy by projecting a path for the federal funds rate and then clearly communicating how changes in the economic outlook might alter it. That sets up an expectations dynamic where households and businesses can “count on" the Fed’s responses to new developments. In a climate of easing, markets would react by driving down long-term interest rates on the expectation that the Fed will lower the policy rate, thus doing the “heavy lifting" to bolster the economy.

Several posts on Liberty Street Economics take note of the tools and approaches that economists use to measure the potential and effectiveness of forward guidance. For example, Richard Crump, Stefano Eusepi, and Emanuel Moench take advantage of a real-world laboratory created by an FOMC meeting in August 2011 when policymakers notably altered guidance. (The post-meeting FOMC statement shifted from saying economic conditions warranted an exceptionally low policy rate “for an extended period" to a more specific date “at least through mid-2013.") Their analysis exploits the timing of surveys in a narrow window just before and after the meeting to show, among other things, that professional forecasters changed their expectations for monetary policy “considerably" and in a manner consistent with the language in the FOMC statement.

In another post, the same authors examined what happened to both market- and survey-based measures of the path of future interest rates in the wake of a June 2013 FOMC meeting. Interestingly, financial market measures (for example, the two-year Treasury yield and a key forward rate) shot up just after the meeting, while professional forecasters’ expectations remained steady. Our bloggers say forecasters “did not interpret Fed communication around the FOMC meeting as signaling a change" in the likely path for the federal funds rate (FFR). Instead, the behavior of rates was attributable to rising term premia, a measure of interest rate risk receiving heightened attention in research, policy discussions, and central bank communications.

Elsewhere on the blog, our economists explained how they use DSGE (dynamic stochastic general equilibrium) models to estimate the effects of forward guidance on macroeconomic variables such as GDP growth, core PCE inflation, and the federal funds rate. A simulation outlined in the post in which the FOMC committed to extending the “liftoff" date of the FFR for two quarters had “implausibly" large effects, including a sharp spike in GDP growth over the next two years, the authors found. But experimentation with a more realistic upper bound on the response of the long-term bond yield showed that “a policy-driven shift in in FFR market expectations . . . would have sizable, though reasonable, effects on GDP growth but only a modest impact on inflation."

That the initial simulation drove such a large change in GDP remains “a forward guidance puzzle," the authors said. Nonetheless, they argue that DSGE models, even with their limitations, are useful to policymakers in trying to estimate the potential effects of their interventions, “particularly when alternative approaches are lacking."

Reading List

Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement?

Richard Crump, Stefano Eusepi, and Emanuel Moench

Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting

Richard Crump, Stefano Eusepi, and Emanuel Moench

The Recent Bond Market Selloff in Historical Perspective

Tobias Adrian and Michael Fleming

The Macroeconomic Effects of Forward Guidance

Marco Del Negro, Marc Giannoni, and Christina Patterson

Disclaimer

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Source

http://libertystreeteconomics.newyorkfed.org/2016/09/from-the-vault-does-forward-guidance-work.html


About the Author

Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Problem With Obamacare Is That It Did Little To Reduce Overall Healthcare Spending
Joan Robinson’s Critique of Marginal Utility Theory
News Blog
Earnings And Economic Reports: Week Starting 12 December 2016
The U.S. Is Home To The Most Unicorns
Why Britain's Public Finances Will Suffer If Brexit Reduces Migration
Working From Home Is Still Rare In The United States
What We Read Today 10 December 2016
The Last Bucket Catch
Joe Sixpack's Situation in 3Q2016: The Average Joe Is Better Off
Why Are Some People More Delinquent On Loans Than Others? - Part 1
Gravity Returns To San Francisco Housing Market
Violent Bond Selloff: An Eye-Opening Perspective
Infographic Of The Day: Identity Theft: You Should Be Worried
Early Headlines: Russia Hacked GOP, Trump To Drain Energy 'Swamp'?, New Sec'y Of State Candidate, India IP Shrinks, India Has World's New Largest Solar Plant , China GDP Hides Volatility And More
Most Coup Attempts In Recent Years Have Failed
Investing Blog
Natural Gas Prices Are Headed Higher In 2017
The New Art Of Utility Investing
Opinion Blog
The US Has A Regime-Uncertainty Problem
Trickle-down Economics, Trump Edition
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
09Dec2016 Market Close: Wall Street Closes On A New High, Trump Sugar High, Crude Prices Testing Resistance, US Dollar Melts Higher
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved