Journal articles: 'Federal Open Market Committee'

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Tori, C. "Federal Open Market Committee meetings and stock market performance." Financial Services Review 10, no. 1-4 (2001): 163–71. http://dx.doi.org/10.1016/s1057-0810(01)00087-7.

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Lin, Jason, and Justin Junkel. "Effect of Federal Open Market Committee on Major Stock Market Indexes." Journal of Finance Issues 6, no. 2 (December 31, 2008): 142–49. http://dx.doi.org/10.58886/jfi.v6i2.2402.

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This project examined the impact of changes in the federal funds rate target on equity prices. The project used ordinary least squares regression to consider the effects of those changes along with corporate profits on stock market value. The goal of the project was to confirm the results of other more narrowly defined studies and in doing so show that the causal relationship is even stronger. The data sets were taken from 1990 through 2006, using the adjusted level of corporate profits and federal funds rate targets as explanatory variables and NYSE and NASDAQ composite indices as dependant variables. The results of this project showed that corporate profits were the largest driver of equity prices, as suggested by current research. It also showed that federal funds rate changes have no impact on equity prices in a direct fashion, because federal funds rate is not the rate directly faced by firms in the market. Overall results did confirm the findings of previous research.

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Ihrig, Jane E., Ellen E. Meade, and Gretchen C. Weinbach. "Rewriting Monetary Policy 101: What’s the Fed’s Preferred Post-Crisis Approach to Raising Interest Rates?" Journal of Economic Perspectives 29, no. 4 (November 1, 2015): 177–98. http://dx.doi.org/10.1257/jep.29.4.177.

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For many years prior to the global financial crisis, the Federal Open Market Committee set a target for the federal funds rate and achieved that target through small purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large-scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the Federal Open Market Committee's target will not work in current circumstances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

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Anderson, Alyssa, and Dave Na. "The Recent Evolution of the Federal Funds Market and its Dynamics during Reductions of the Federal Reserve’s Balance Sheet." FEDS Notes, no. 2024-07-11 (July 2024): None. http://dx.doi.org/10.17016/2380-7172.3548.

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Following its May 2024 meeting, the Federal Open Market Committee (FOMC) announced that it would slow the pace of its balance sheet reduction starting in June 2024. This will allow for a more gradual transition from an abundant to ample supply of reserves. As reserves decline, conditions in money markets, including the federal (fed) funds market, will be important in judging whether the supply of reserves is approaching ample.

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Chang, Andrew C., and Tyler J. Hanson. "The Accuracy of Forecasts Prepared for the Federal Open Market Committee." Finance and Economics Discussion Series 2015, no. 062 (August 2015): 1–24. http://dx.doi.org/10.17016/feds.2015.062.

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Chang, Andrew C., and Tyler J. Hanson. "The accuracy of forecasts prepared for the Federal Open Market Committee." Journal of Economics and Business 83 (January 2016): 23–43. http://dx.doi.org/10.1016/j.jeconbus.2015.12.001.

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Ihrig, Jane, and Chris Waller. "The Federal Reserve’s responses to the post-Covid period of high inflation." FEDS Notes, no. 2024-02-14 (February 2024): None. http://dx.doi.org/10.17016/2380-7172.3455.

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In the face of the COVID-19 pandemic in March 2020, the Federal Reserve committed to using its full range of tools to support the U.S. economy. Over the next year and a half, with progress on vaccinations and strong policy support, indicators of economic activity and employment strengthened while inflation moved higher. Faced with a tight labor market and elevated inflation, the Federal Open Market Committee (FOMC) began a process of unwinding the very accommodative stance of monetary policy and moving to a restrictive policy stance to address inflation pressures. Here we review the sequence of actions taken by the Committee between late 2020 and mid-2023 as well as discuss some issues it contemplated along the way; the table provides a chronological list of key events over this period.

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Grier, Kevin B. "Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee." Public Choice 129, no. 1-2 (May 25, 2006): 247–48. http://dx.doi.org/10.1007/s11127-006-9023-2.

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Krause, George A. "Agent heterogeneity and consensual decision making on the Federal Open Market Committee." Public Choice 88, no. 1-2 (July 1996): 83–101. http://dx.doi.org/10.1007/bf00130411.

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Ehrmann, Michael, Robin Tietz, and Bauke Visser. "Voting Right Rotation, Behavior of Committee Members and Financial Market Reactions: Evidence from the U.S. Federal Open Market Committee." IMF Working Papers 2022, no. 105 (May 2022): 1. http://dx.doi.org/10.5089/9798400210075.001.

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Gorodnichenko, Yuriy, Tho Pham, and Oleksandr Talavera. "The Voice of Monetary Policy." American Economic Review 113, no. 2 (February 1, 2023): 548–84. http://dx.doi.org/10.1257/aer.20220129.

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We develop a deep learning model to detect emotions embedded in press conferences after the Federal Open Market Committee meetings and examine the influence of the detected emotions on financial markets. We find that, after controlling for the Federal Reserve’s actions and the sentiment in policy texts, a positive tone in the voices of Federal Reserve chairs leads to significant increases in share prices. Other financial variables also respond to vocal cues from the chairs. Hence, how policy messages are communicated can move the financial market. Our results provide implications for improving the effectiveness of central bank communications. (JEL D83, E31, E44, E52, E58, F31, G14)

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Boguth, Oliver, Vincent Grégoire, and Charles Martineau. "Shaping Expectations and Coordinating Attention: The Unintended Consequences of FOMC Press Conferences." Journal of Financial and Quantitative Analysis 54, no. 6 (October 8, 2018): 2327–53. http://dx.doi.org/10.1017/s0022109018001357.

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In an effort to increase transparency, the chair of the Federal Reserve now holds a press conference (PC) following some, but not all, Federal Open Market Committee (FOMC) announcements. Evidence from financial markets shows that investors lower their expectations of important decisions on days without PCs and that these announcements convey less price-relevant information. Correspondingly, we show that investors pay more attention to upcoming announcements with PCs. This coordination of attention can reduce welfare in models of the social value of public information. Consistent with theories of investor attention, the market risk premium is larger on days with PCs.

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Burk, Nicholas, and David H. Small. "The FOMC's Committee on the Directive: Behind Volcker's New Operating Procedures." Finance and Economics Discussion Series, no. 2022-063 (September 2022): 1–38. http://dx.doi.org/10.17016/feds.2022.063.

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On October 6, 1979, Chairman Volcker announced that the Federal Reserve was embarking on a new, forceful, and ultimately successful campaign to lower the rampant inflation of that time. At the center of this campaign were new operating procedures for conducting monetary policy—procedures that focused daily open market operations on controlling the quantity of monetary reserves and the quantity of nonborrowed reserves in particular. This was a dramatic shift from the prior focus on targeting the federal funds rate. These new operating procedures were preceded by well over a decade of work that was directed by the Federal Open Market Committee (FOMC) and was carried out by its Committee on the Directive (COD). Prior to 1979, the COD had recommended, but then rejected, operating procedures based on controlling nonborrowed reserves. It was the Volcker Fed that accepted and implemented these reserves-based operating procedures, and it did so with the goal of targeting the monetary aggregates to have restrained and stable growth rates.

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Pierdzioch, Christian, Jan-Christoph Rülke, and Peter Tillmann. "USING FORECASTS TO UNCOVER THE LOSS FUNCTION OF FEDERAL OPEN MARKET COMMITTEE MEMBERS." Macroeconomic Dynamics 20, no. 3 (January 6, 2016): 791–818. http://dx.doi.org/10.1017/s1365100514000625.

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We revisit the sources of the bias in Federal Reserve forecasts and assess whether a precautionary motive can explain the forecast bias. In contrast to the existing literature, we use forecasts submitted by individual Federal Open Market Committee (FOMC) members to uncover members' implicit loss function. Our key finding is that the loss function of FOMC members is asymmetric: FOMC members incur a higher loss when they underpredict (overpredict) inflation and unemployment (nominal and real growth) as compared to their making an overprediction (underprediction) of similar size. We also find that an asymmetric loss function, in some cases, weakens evidence against forecast rationality, though results depend on the variable being projected and the subgroup of FOMC members being studied. Furthermore, we add to the recent controversy on the relative quality of FOMC forecasts compared to staff forecasts. Our results suggest that differences in predictive ability could indeed stem from differences in preferences.

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Nakazono, Yoshiyuki. "Strategic behavior of Federal Open Market Committee board members: Evidence from members’ forecasts." Journal of Economic Behavior & Organization 93 (September 2013): 62–70. http://dx.doi.org/10.1016/j.jebo.2013.07.013.

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Langerfeld, Christian, and Gisle Andersen. "The Dynamics of Turn-taking in Meetings of the Federal Open Market Committee." Fachsprache 45, no. 3-4 (November 20, 2023): 187–210. http://dx.doi.org/10.24989/fs.v45i3-4.2201.

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In applied linguistics relatively little empirical research has been devoted to the study of spoken language compared to written genres. This article aims to complement previous research by focusing on domain-specific language use in discussions of monetary policy held by the Federal Open Market Committee in the U.S. We take a corpus-based and discourse-analytic approach and explore the dynamics of turn-taking within this spoken genre based on a recently compiled corpus. In a bottom-up fashion, we explore the corpus with a view to documenting items used to manage the interaction in this formalised and highly specified communicative setting. The concordance and frequency functions of the corpus provide a good way of charting recurrent patterns in the sequential organisation of this discourse genre. Turn-taking is constrained in ways that are characteristic of the meeting genre. Parts of the meeting are dynamically interactive, while other parts are more monologic in nature. Transitions between speakers is regulated through various explicit and less explicit means. Although the chairperson has a particular role in this, the attendees also contribute to the regulation. Turn-regulating mechanisms are often formulaic in nature and turn transitions tend to co-occur with speech acts specific to the interactional setting, such as thanking, addressing a designated speaker, expressing agreement, asking for clarification, ensuring co-participation from others, etc. These functions vary according to their placement in the stretch of discourse that constitutes an agenda item or a meeting.

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Bernstein, Mark F. "The Federal Open Market Committee and the Sharing of Governmental Power with Private Citizens." Virginia Law Review 75, no. 1 (February 1989): 111. http://dx.doi.org/10.2307/1073219.

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18

Woolley, John T., and Joseph Gardner. "The effect of “sunshine” on policy deliberation: The case of the Federal Open Market Committee." Social Science Journal 54, no. 1 (March 1, 2017): 13–29. http://dx.doi.org/10.1016/j.soscij.2016.09.006.

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FARKA, MIRA. "THE ASYMMETRIC IMPACT OF “INFORMATIVE” AND “UNINFORMATIVE” FEDERAL OPEN MARKET COMMITTEE STATEMENTS ON ASSET PRICES." Contemporary Economic Policy 29, no. 4 (October 18, 2010): 469–93. http://dx.doi.org/10.1111/j.1465-7287.2010.00227.x.

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Londono, Juan M., Sai Ma, and Beth Anne Wilson. "Global Inflation Uncertainty and its Economic Effects." FEDS Notes, no. 2023-09-25 (September 2023): None. http://dx.doi.org/10.17016/2380-7172.3391.

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Policymakers, including Federal Open Market Committee (FOMC) participants, have been stressing the elevated level of uncertainty, especially related to inflation, and the challenge this poses for monetary policy. As seen in Figure 1, with few exceptions, FOMC participants see the level of uncertainty around their forecasts for core PCE inflation as high, compared to the average over the past 20 years.

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González-Astudillo, Manuel, and Rakeen Tanvir. "Hawkish or Dovish Fed? Estimating a Time-Varying Reaction Function of the Federal Open Market Committee's Median Participant." Finance and Economics Discussion Series, no. 2023-070 (November 2023): 1–40. http://dx.doi.org/10.17016/feds.2023.070.

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This paper estimates a time-varying reaction function of the median participant of the Federal Open Market Committee, using a Taylor rule with time-varying coefficients estimated on one- to three-year ahead median forecasts of the federal funds rate, inflation, and the unemployment rate from the Summary of Economic Projections (SEP). We estimate the model with Bayesian methods, incorporating the effective lower bound on the median federal funds rate projections. The results indicate that the monetary policy rule has become significantly more persistent after the pandemic than in the years prior, and it currently reacts strongly to inflation, at more than twice the responsiveness estimated prior to 2020. Our proposed policy rule produces accurate predictions of the median federal funds rate projections in real time for given SEP forecasts of inflation and the unemployment rate, suggesting that the median participant's reaction function is well-represented by our assumed Taylor rule with time-varying coefficients. Our results show that the median participant's reaction function becomes less persistent and less responsive to inflation yet more responsive to the output gap in anticipation of tighter monetary policy conditions. We also find that labor market activity, inflation, and macroeconomic uncertainty correlate significantly with the evolution of the time-varying coefficients of the rule. Finally, we show that in times of a less persistent policy rule or more responsiveness to inflation, markets perceive nominal bonds as better macroeconomic hedges.

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Baerg, Nicole, and Will Lowe. "A textual Taylor rule: estimating central bank preferences combining topic and scaling methods." Political Science Research and Methods 8, no. 1 (September 18, 2018): 106–22. http://dx.doi.org/10.1017/psrm.2018.31.

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AbstractScholars often use voting data to estimate central bankers’ policy preferences but consensus voting is commonplace. To get around this, we combine topic-based text analysis and scaling methods to generate theoretically motivated comparative measures of central bank preferences on the US Federal Open Market Committee (FOMC) leading up to the financial crisis in a way that does not depend on voting behavior. We apply these measures to a number of applications in the literature. For example, we find that FOMC members that are Federal Reserve Bank Presidents from districts experiencing higher unemployment are also more likely to emphasize unemployment in their speech. We also confirm that committee members on schedule to vote are more likely to express consensus opinion than their off schedule voting counterparts.

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Wang, Yifei. "Aspect-based Sentiment Analysis in Document - FOMC Meeting Minutes on Economic Projection." Highlights in Science, Engineering and Technology 68 (October 9, 2023): 336–41. http://dx.doi.org/10.54097/hset.v68i.12116.

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The Federal Open Market Committee (FOMC) within the Federal Reserve System is responsible for managing inﬂation, maximizing employment, and stabilizing interest rates. Meeting minutes play an important role for market movements because they provide the bird’s eye view of how this economic complexity is constantly re-weighed. Therefore, there has been growing interest in analyzing and extracting sentiments on various aspects from large ﬁnancial texts for economic projection. However, Aspect-based Sentiment Analysis (ABSA) is not widely used on ﬁnancial data due to the lack of large labeled dataset. In this paper, I propose a model to train ABSA on ﬁnancial documents under weak supervision and analyze its predictive power on various macroeconomic indicators.

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Bao, Trung Hoang, and Cesario Mateus. "Impact of FOMC announcement on stock price index in Southeast Asian countries." China Finance Review International 7, no. 3 (August 21, 2017): 370–86. http://dx.doi.org/10.1108/cfri-06-2016-0051.

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Purpose The purpose of this paper is to examine the impact of Federal Open Market Committee (FOMC) announcements, which includes information about the targeted Federal fund rate and revision to the future path of monetary policy on Southeast Asian stock market performance. Design/methodology/approach This paper has used a sample of five national equity market indexes over the period 1997-2013 that covers 132 scheduled FOMC meetings. The authors have developed the model of Wongswan (2009) and Kontonikas et al. (2013) to quantify target surprise and path surprise. Findings The results first show that all the stock markets examined do respond to information in FOMC announcements. Second, the target Federal fund rate has more impact on Southeast Asian stocks performance than information about the future path of monetary policy does. Third, different Southeast Asian equity markets respond similarly to targeting the Federal fund rate, while the responses to monetary policy differ from each other. Fourth, the response of each country to the FOMC announcement is not statistically different in the two periods of financial crisis. Research limitations/implications Southeast Asian financial markets are increasingly highly correlated to the US market. The main channel in which FOMC announcement has impact on Southeast Asian stock markets is through US price transmission. This is the case of foreign firms borrowing from the US market. Then, an increase in interest rate, which means that the cost of financing increases, will lower firm equity value. Originality/value The understanding of the response of the Southeast Asian stock markets to target surprise and path surprise, and the impact of each surprise in different time periods, would be important to investors and encourage further discussion amongst academics in Southeast Asia, where stock markets have been emerging in recent years.

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Kallianiotis, Ioannis N. "Implementing Monetary Policy after the 2008 Financial Crisis." Archives of Business Research 7, no. 9 (September 26, 2019): 141–72. http://dx.doi.org/10.14738/abr.79.7106.

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Every six weeks or so (9 times during the year), the financial world watches as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market for the next period. But what happens next? How do policymakers make sure that interest rates in the fed funds market trade within the target range? What will be the effect of the new target rate on the Wall Street and the Main Street? How efficient is so far the monetary policy after the latest global financial crisis? Is the target rate the correct one? The framework that the FOMC uses to implement monetary policy has changed over the last decade and continues to evolve today. Before the 2008 financial crisis, policymakers used one set of instruments to achieve the target rate. However, several policy interventions introduced soon after the crisis drastically altered the landscape of the federal funds market. This new and uncertain environment, with enormous reserves, necessitated a new set of instruments for monetary policy implementation. Lately, after December 2015, as the FOMC began to unwind the effects of these policy interventions, some questions arise: What rules will be followed by the Fed? What happens next as the federal funds market converges to a “new normal”? How effective will be the new policy? Can the Fed prevent a new crisis? The federal funds rate is very low and affects negatively the financial markets (bubbles are growing), the real rates of interest, and the deposit rates, which means the true economic welfare is falling and a new global recession is in preparation, if the latest easy money policy will continue.

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Madeira, Carlos, and João Madeira. "The Effect of FOMC Votes on Financial Markets." Review of Economics and Statistics 101, no. 5 (December 2019): 921–32. http://dx.doi.org/10.1162/rest_a_00770.

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This paper shows that since votes of members of the Federal Open Market Committee have been included in press statements, stock prices increase after the announcement when votes are unanimous but fall when dissent (which typically is due to preference for higher interest rates) occurs. This pattern started prior to the 2007–2008 financial crisis. The differences in stock market reaction between unanimity and dissent remain, even controlling for the stance of monetary policy and consecutive dissent. Statement semantics also do not seem to explain the documented effect. We find no differences between unanimity and dissent with respect to impact on market risk and Treasury securities.

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Weise, Charles L. "Political Pressures on Monetary Policy During the US Great Inflation." American Economic Journal: Macroeconomics 4, no. 2 (April 1, 2012): 33–64. http://dx.doi.org/10.1257/mac.4.2.33.

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Drawing on an analysis of Federal Open Market Committee (FOMC) documents, this paper argues that political pressures on the Federal Reserve were an important contributor to the rise in inflation in the United States in the 1970s. Members of the FOMC understood that a serious attempt to tackle inflation would generate opposition from Congress and the executive branch. Political considerations contributed to delays in monetary tightening, insufficiently aggressive anti-inflation policies, and the premature abandonment of attempts at disinflation. Empirical analysis verifies that references to the political environment at FOMC meetings are correlated with the stance of monetary policy during this period. (JEL D72, E32, E52, E58, N12)

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Xu, Chenning. "The Impact of Unexpected FOMC Actions on Corporate Earnings Expectations." Advances in Economics, Management and Political Sciences 79, no. 1 (April 26, 2024): 166–74. http://dx.doi.org/10.54254/2754-1169/79/20241807.

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This paper fills a gap in the literature by examining the impact of unexpected Federal Open Market Committee (FOMC) actions on the markets expectations of U.S. corporate earnings by examining the sell-side analysts' quarterly earnings forecasts from 1989 to 2022. This paper reveals a significant negative correlation between analysts' earnings forecasts and unexpected changes in the target interest rate. This correlation weakened after the Federal Reserves implementation of Forward Guidance as a monetary tool in 2004, which appears to enhance the market's ability to predict target rate adjustments. In addition, this paper shows that with a given amount of unexpected target rate changes, value firms display greater earnings forecast revisions from analysts than growth firms. Debt levels or profitability factors cannot fully explain this phenomenon. The findings of this paper contribute to the knowledge of how FOMC actions exert influence on equity valuations and the transmission mechanisms of monetary policies.

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Swanson, Eric T. "The Importance of Fed Chair Speeches as a Monetary Policy Tool." AEA Papers and Proceedings 113 (May 1, 2023): 394–400. http://dx.doi.org/10.1257/pandp.20231073.

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I estimate the effects of Federal Open Market Committee (FOMC) announcements, post-FOMC press conferences, and speeches and Congressional testimony by the Fed chair on stock prices, Treasury yields, and interest rate futures from 1988 to 2019. I show that for all but the very shortest-maturity interest rate futures, Fed chair speeches are more important than FOMC announcements. My results suggest that the previous literature's focus on FOMC announcements has ignored the most important source of variation in US monetary policy.

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Allen, William A., and Terence Mills. "How Forecasts Evolve - The Growth Forecasts of the Federal Reserve and the Bank of England." National Institute Economic Review 193 (July 2005): 53–59. http://dx.doi.org/10.1177/0027950105058553.

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We investigate how central bank forecasts of GDP growth evolve through time, and how they are adapted in the light of official estimates of actual GDP growth. Using data for 1988–2005, we find that the Federal Open Market Committee (FOMC) has typically adjusted its forecast for growth over the coming four quarters by about a third of the unexpected component of estimated growth in the four quarters most recently ended. We were unable to find any clear signs of systematic errors in the FOMC's forecasts. UK data for 1998–2005 suggest that the Bank of England Monetary Policy Committee (MPC) did not adjust its forecasts in this way, and that there were systematic forecast errors, but the evidence from the latter part of the period 2001–5 tentatively shows a behaviour pattern closer to that of the FOMC, with no clear signs of systematic errors.

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Eichengreen, Barry, Poonam Gupta, and Rishabh Choudhary. "The Taper This Time." Indian Public Policy Review 3, no. 1 (Jan-Feb) (January 14, 2022): 1–17. http://dx.doi.org/10.55763/ippr.2022.03.01.001.

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On November 3, 2021, the Federal Open Market Committee announced that it would reduce the scale of its asset purchases by $15 billion a month starting immediately. Do emerging markets, such as India, need to prepare for a replay of the taper tantrum of 2013? We show that emerging markets, including India, have strengthened their external economic and financial positions since 2013. At the same time, fiscal deficits are much wider, and public debts are much heavier. As U.S. interest rates now begin moving up, servicing existing debts and preventing the debt-to-GDP ratio from rising still further will become more challenging. Either taxes have to be raised or public spending must be cut to generate additional revenues for debt servicing.

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Nikkinen, Jussi, and Petri Sahlström. "Impact of the federal open market committee's meetings and scheduled macroeconomic news on stock market uncertainty." International Review of Financial Analysis 13, no. 1 (March 2004): 1–12. http://dx.doi.org/10.1016/j.irfa.2004.01.001.

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Woolley, John T. "Les conséquences du fédéralisme sur l’élaboration de la politique de la Réserve fédérale." Revue française d'administration publique 92, no. 1 (1999): 671–79. http://dx.doi.org/10.3406/rfap.1999.3344.

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The Consequences of a Fedéral Structure on the Construction of the Policy of the Federal Reserve ; The Federal Reserve has a regional composition formed by twelve district banks and a central council, the council of govemors. Several institutional characteristics contribute to the independence of the Fédéral Reserve, however the four-year mandate of the president of the Reserve expires, quite by chance, at the beginning of the year of the presidential élection, something which is not without conséquence for the relations between the Reserve and those in political power. The Federal Open Market Committee, the principal decision-making body of the Reserve, is made up notably of the presidents of the district banks, often accused of carrying out a strict form of monetary policy. An analysis of the reports of meetings over a limited period allows for a clarification of this judgement.

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Mroziewicz, Krzysztof. "Too big, too small: Why the size of the FOMC does matter." Ekonomia 28, no. 2 (March 7, 2023): 35–41. http://dx.doi.org/10.19195/2658-1310.28.2.3.

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The present article discusses the effectiveness of the decision-making body of the Federal Reserve System (Federal Open Market Committee, or FOMC for short) in the context of management. It focuses on the size of the FOMC as a group larger than the optimum of the group’s effectiveness (depending on the study, the optimum size of the group should be three to eight or five to seven people). The article also discusses the potential negative consequences of too large a group and ways to improve group decisions. The last part of the paper includes an explanation of the decision-making structural composition, and thus partially answers the question of why the FOMC consists of seventeen members, and its decision-making composition of twelve.

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Bauer, Michael D., Ben S. Bernanke, and Eric Milstein. "Risk Appetite and the Risk-Taking Channel of Monetary Policy." Journal of Economic Perspectives 37, no. 1 (February 1, 2023): 77–100. http://dx.doi.org/10.1257/jep.37.1.77.

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Monetary policy affects financial markets and the broader economy in part by changing the risk appetite of investors. This article provides new evidence for this so-called risk-taking channel of monetary policy by revisiting and extending event-study analysis of Federal Open Market Committee announcements. We document significant effects of unexpected monetary policy changes on risk indicators drawn from equity, fixed-income, credit, and foreign exchange markets. We develop a new index of risk appetite based on the common component of these indicators. Surprise monetary easing leads to strong and persistent increases in our index, and vice versa for tightening surprises, consistent with the view that monetary policy affects asset prices in large part through its effects on risk appetite. We discuss the implications of the risk-taking channel for monetary policy transmission, optimal monetary policy, and financial stability.

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Burke, John, and Andreas Christofi. "The Relative Effectiveness of the Fed Funds Futures and the Federal Open Market Committee (FOMC) Dot Plots in Predicting the Future Federal Funds Rate." Journal of Fixed Income 28, no. 4 (March 31, 2019): 73–83. http://dx.doi.org/10.3905/jfi.2019.28.4.073.

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Chang, Andrew C., and Trace J. Levinson. "Raiders of the Lost High-Frequency Forecasts: New Data and Evidence on the Efficiency of the Fed's Forecasting." Finance and Economics Discussion Series 2020, no. 089 (October 22, 2020): 1–56. http://dx.doi.org/10.17016/feds.2020.090.

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We introduce a new dataset of real gross domestic product (GDP) growth and core personal consumption expenditures (PCE) inflation forecasts produced by the staff of the Board of Governors of the Federal Reserve System. In contrast to the eight Greenbook forecasts a year the staff produces for Federal Open Market Committee (FOMC) meetings, our dataset has roughly weekly forecasts. We use these new data to study whether the staff forecasts efficiently and whether efficiency, or lack thereof, is time-varying. Prespecified regressions of forecast errors on forecast revisions show that the staff's GDP forecast errors correlate with its GDP forecast revisions, particularly for forecasts made more than two weeks from the start of a FOMC meeting, implying GDP forecasts exhibit time-varying inefficiency between FOMC meetings. We find some weaker evidence for inefficient inflation forecasts.

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Bobrov, Anton, Rupal Kamdar, and Mauricio Ulate. "Regional Dissent: Do Local Economic Conditions Influence FOMC Votes?" Federal Reserve Bank of San Francisco, Working Paper Series 2024, no. 05 (February 26, 2024): 01–30. http://dx.doi.org/10.24148/wp2024-05.

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U.S. monetary-policy decisions are made by the 12 voting members of the Federal Open Market Committee (FOMC). Seven of these members, coming from the Federal Reserve Board of Governors, inherently represent national-level interests. The remaining five members, a rotating group of presidents from the 12 Federal Reserve districts, come instead from sub-national jurisdictions. Does this structure have relevant implications for the monetary policy-making process? In this paper, we first build a panel dataset on economic activity across Fed districts. We then provide evidence that regional economic conditions influence the voting behavior of district presidents. Specifically, a regional unemployment rate that is one percentage point higher than the U.S. level is associated with an approximately nine percentage points higher probability of dissenting in favor of looser policy at the FOMC. This result is statistically significant, robust to different specifications, and indicates that the regional component in the structure of the FOMC could matter for monetary policy.

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Bailey, Andrew, and Cheryl Schonhardt-Bailey. "Does Deliberation Matter in FOMC Monetary Policymaking? The Volcker Revolution of 1979." Political Analysis 16, no. 4 (2008): 404–27. http://dx.doi.org/10.1093/pan/mpn005.

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In monetary policy, decision makers seek to influence the expectations of agents in ways that can avoid making abrupt, dramatic, and unexpected decisions. Yet in October 1979, Chairman Paul Volcker led the Federal Reserve's Federal Open Market Committee (FOMC) unanimously to shift its course in managing U.S. monetary policy, which in turn eventually brought the era of high inflation to an end. Although some analysts argue that “the presence and influence of one individual”—namely, Volcker—is sufficient to explain the policy shift, this overlooks an important feature of monetary policymaking. FOMC chairmen—however, omnipotent they may appear—do not act alone. They require the agreement of other committee members, and in the 1979 revolution, the decision was unanimous. How, then, did Chairman Volcker manage to bring a previously divided committee to a consensus in October 1979, and moreover, how did he retain the support of the committee throughout the following year in the face of mounting political and economic pressure against the Fed? We use automated content analysis to examine the discourse of the FOMC (with this discourse recorded in the verbatim transcripts of meetings). In applying this methodology, we assess the force of the arguments used by Chairman Volcker and find that deliberation in the FOMC did indeed “matter” both in 1979 and 1980. Specifically, Volcker led his colleagues in coming to understand and apply the idea of credible commitment in U.S. monetary policymaking.

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Fligstein, Neil, Jonah Stuart Brundage, and Michael Schultz. "Seeing Like the Fed: Culture, Cognition, and Framing in the Failure to Anticipate the Financial Crisis of 2008." American Sociological Review 82, no. 5 (September 7, 2017): 879–909. http://dx.doi.org/10.1177/0003122417728240.

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One of the puzzles about the financial crisis of 2008 is why regulators, particularly the Federal Open Market Committee (FOMC), were so slow to recognize the impending collapse of the financial system and its broader consequences for the economy. We use theory from the literature on culture, cognition, and framing to explain this puzzle. Consistent with recent work on “positive asymmetry,” we show how the FOMC generally interpreted discomforting facts in a positive light, marginalizing and normalizing anomalous information. We argue that all frames limit what can be understood, but the content of frames matters for how facts are identified and explained. We provide evidence that the Federal Reserve’s primary frame for making sense of the economy was macroeconomic theory. The content of macroeconomics made it difficult for the FOMC to connect events into a narrative reflecting the links between foreclosures in the housing market, the financial instruments used to package the mortgages into securities, and the threats to the larger economy. We conclude with implications for the sociological literatures on framing and cognition and for decision-making in future crises.

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Weller, Brian M. "Measuring Tail Risks at High Frequency." Review of Financial Studies 32, no. 9 (December 13, 2018): 3571–616. http://dx.doi.org/10.1093/rfs/hhy133.

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Abstract I exploit information in the cross-section of bid-ask spreads to develop a new measure of extreme event risk. Spreads embed tail risk information because liquidity providers require compensation for the possibility of sharp changes in asset values. I show that simple regressions relating spreads and trading volume to factor betas recover this information and deliver high-frequency tail risk estimates for common factors in stock returns. My methodology disentangles financial and aggregate market risks during the 2007–2008 financial crisis; quantifies jump risks associated with Federal Open Market Committee announcements; and anticipates an extreme liquidity shock before the 2010 Flash Crash. Received April 27, 2016; editorial decision August 10, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

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Kalfa, S. Yanki, and Jaime Marquez. "Forecasting FOMC Forecasts." Econometrics 9, no. 3 (September 14, 2021): 34. http://dx.doi.org/10.3390/econometrics9030034.

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(Hendry 1980, p. 403) The three golden rules of econometrics are “test, test, and test”. The current paper applies that approach to model the forecasts of the Federal Open Market Committee over 1992–2019 and to forecast those forecasts themselves. Monetary policy is forward-looking, and as part of the FOMC’s effort toward transparency, the FOMC publishes its (forward-looking) economic projections. The overall views on the economy of the FOMC participants–as characterized by the median of their projections for inflation, unemployment, and the Fed’s policy rate–are themselves predictable by information publicly available at the time of the FOMC’s meeting. Their projections also communicate systematic behavior on the part of the FOMC’s participants.

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Yun, Jaesun. "Analyzing the Influence of Monetary Policy Announcements on Foreign Exchange Futures Markets." Academic Society of Global Business Administration 20, no. 3 (June 30, 2023): 85–104. http://dx.doi.org/10.38115/asgba.2023.20.3.85.

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This study analyses the impact of monetary policy announcements by the Bank of Korea and the U.S. central bank on the prices, volumes, and open interest of four foreign exchange futures listed and traded on the Korea Exchange: dollar futures, yen futures, euro futures, and yuan futures. The study examines whether the prices, volumes, and open interest of the foreign exchange futures differ from other periods in even-numbered weeks (weeks 0, 2, 4, and 6) beginning on the day before, day of, and week of the monetary policy announcements by the Financial Services Commission and the Federal Open Market Committee and the regular meeting dates of the Federal Reserve from 2005 to 2019. The main findings of this study are as follows First, I find that returns on foreign exchange futures slow down around the time of monetary policy announcements. This reflects the tendency of investors to hold off on trading before the information following the monetary policy announcement is released. Second, I observe an increase in foreign exchange futures trading volume on monetary policy announcement days. This could be interpreted as investors resuming trading once the information is released after the monetary policy announcement. Third, I observe a decrease in open interest in foreign exchange futures around monetary policy announcements. This suggests that when there is uncertainty about the monetary policy announcement, investors reduce their exposure to manage their risk on foreign exchange futures. Finally, I compare the effects before and after the financial crisis and do not find any significant differences. I find that investors reduce their directional investments in foreign exchange futures during monetary policy announcements and resume trading after the uncertainty is resolved through the policy announcement, thus confirming the significant impact of monetary policy announcements in the Korean foreign exchange futures market. This study has both theoretical and practical implications as it supports that monetary policy announcements play a significant role in increasing and resolving uncertainty in the foreign exchange market.

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N. Kallianiotis, Dr Ioannis. "Can Monetary Policy Prevent Financial Crises?" International Journal of Economics and Financial Research, no. 64 (April 25, 2020): 51–75. http://dx.doi.org/10.32861/ijefr.64.51.75.

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Monetary policy is an important public policy, but it is not the only one to stabilize our economy and reduce its business cycles. The leading central bank, the Federal Reserve of the U.S., has introduced, after the 2008 global financial crisis, new instruments and unusual facilities to implement its new innovative monetary policy. The financial world and mostly the social scientists watch as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market for the next period. The framework that the FOMC uses to implement monetary policy has changed over the last twelve years and continues to evolve today. Here, we try to evaluate the new instruments and their “effectiveness”. Before the 2008 financial crisis, policymakers used one set of traditional instruments (tools) to achieve the target rate. However, several policy interventions, introduced soon after the crisis, drastically altered the landscape of the federal funds market and the traditional economic theory. This new and uncertain environment, with enormous reserves and even interest on reserves, necessitated a new set of instruments by the Fed for its monetary policy implementation. Lately, after seven years of zero interest rate, the FOMC began in December 2015 to increase the target rate and then, went back again to a lower one, but many questions arise. How did they evaluate the effectiveness of these new instruments? Is the current federal funds rate the appropriate one for our economic wellbeing? How efficient was so far this ZIR monetary policy after the latest global financial crisis? Why the Fed put all these burdens of its ‘innovated” new monetary policy to the poor taxpayers (bail out) and to the risk-averse depositors (bail in)? Is it possible for the Fed’s policy to prevent the future financial crises? The federal funds rate was very low and affected negatively the financial markets (bubbles were growing), the real rates of interest (it is negative for twelve years), and the deposit rates (they are closed to zero for twelve years). The redistribution of wealth of depositors and taxpayers continues, which means the true economic welfare is falling and a new global recession was in preparation, if the current unfair easy money policy will persist, ignoring the necessity of a prevention of financial crises. Then, it came as an unexpected plague the coronavirus pandemic, following with a new but, the worse in economic history global crisis (chaos).

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Ashley, Richard, Kwok Ping Tsang, and Randal Verbrugge. "A new look at historical monetary policy (and the great inflation) through the lens of a persistence-dependent policy rule." Oxford Economic Papers 72, no. 3 (April 24, 2020): 672–91. http://dx.doi.org/10.1093/oep/gpaa006.

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Abstract The origins of the Great Inflation, a central 20th-century U.S. macroeconomic event, remain contested. Prominent explanations are poor inflation forecasts or inaccurate output gap measurement. An alternative view is that the Federal Open Market Committee (FOMC) was unwilling to fight inflation, perhaps due to political pressures. Here, we sort this out via a novel econometric approach, disaggregating the real-time unemployment and inflation time series entering the FOMC historical policy reaction-function into persistence components, using one-sided Fourier filtering; this implicitly estimates the unemployment gap in actual use. We find compelling evidence for (economically interpretable) persistence-dependence in both variables. Furthermore, our results support the “unwilling to fight” view: the FOMC’s unemployment gap responses were essentially unchanged pre- and post-Volcker, while its inflation responses sharpened markedly starting with Volcker.

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Bakeev, Murat. "Academic Macroeconomics and Monetary Policy: Topic Modeling Based on Transcripts of the Meetings of the Federal Open Market Committee from 1976 to 2016." OEconomia, no. 13-2 (June 1, 2023): 393–425. http://dx.doi.org/10.4000/oeconomia.15513.

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Gardner, Ben, Chiara Scotti, and Clara Vega. "Words Speak as Loudly as Actions: Central Bank Communication and the Response of Equity Prices to Macroeconomic Announcements." Finance and Economics Discussion Series 2021, no. 072 (November 18, 2021): 1–67. http://dx.doi.org/10.17016/feds.2021.074.

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While the literature has already widely documented the effects of macroeconomic news announcements on asset prices, as well as their asymmetric impact during good and bad times, we focus on the reaction to news based on the description of the state of the economy as painted by the Federal Open Market Committee (FOMC) statements. We develop a novel FOMC sentiment index using textual analysis techniques, and find that news has a bigger (smaller) effect on equity prices during bad (good) times as described by the FOMC sentiment index. Our analysis suggests that the FOMC sentiment index offers a reading on current and future macroeconomic conditions that will affect the probability of a change in interest rates, and the reaction of equity prices to news depends on the FOMC sentiment index which is one of the best predictors of this probability.

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Peciulis, Tomas, and Asta Vasiliauskaite. "Effect of Monetary Policy Decisions and Announcements on the Price of Cryptocurrencies: An Elastic-Net With Arima Residuals Approach." Economics and Culture 21, no. 1 (June 1, 2024): 77–92. http://dx.doi.org/10.2478/jec-2024-0006.

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Abstract Research purpose. This study analysed the three cryptocurrencies with the largest market capitalization: Bitcoin, Ether (cryptocurrency built upon the Ethereum project's blockchain technology), and Binance coin, which account for 60% of the total cryptocurrency market capitalization. The purpose of this research was to measure the impact of monetary policy on the price of these cryptocurrencies using an adjusted R squared. Design / Methodology / Approach. As dependent variables, we used interest rates controlled by the European Central Bank and the Federal Reserve and reports from the European Central Bank and the Federal Open Market Committee. A robust Elastic Net Regression with Autoregressive Integrated Moving Average (ARIMA) residuals machine learning approach was applied to obtain robust regression coefficients and corresponding standard errors. To ascertain the robustness of the model, a technique known as rolling window cross-validation was employed. Findings. The results of this study show that monetary policy decisions and announcements significantly impact the price of cryptocurrencies. The impact on cryptocurrencies is likely to be significant both in the period of economic stability (2018-2020) and in the period of economic shocks (2020-2022). This relationship is likely to be indirect, acting through investor sentiment. Originality / Value / Practical implications. The results of this study may be useful to monetary policymakers, as they reveal the link between their actions and the price of cryptocurrencies. Our model will also be useful for mutual fund managers and private investors, as they can anticipate the price dynamics of cryptocurrencies when assessing monetary policy frameworks.

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Qayyum, Abdul. "Monetary Conditions Index: A Composite Measure of Monetary Policy in Pakistan." Pakistan Development Review 41, no. 4II (December 1, 2002): 551–66. http://dx.doi.org/10.30541/v41i4iipp.551-566.

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Accurate measures of the size and direction of changes in monetary policy are very important. A number of variables/indicators have been used as a measure of the stance of monetary policy the world over. These include growth rates of monetary aggregates and credit aggregates, short-term interest rate as used by Sims (1992), index of minutes of Federal Open Market Committee (FOMC), as suggested by Friedman and Schwartz (1963) and reintroduced by Romer and Romer (1989), monetary policy index constructed by employing Vector Autoregression (VAR) estimation technique with prior information from Central Bank such as Bernanke and Blinder (1992) and Bernanke and Mihov (1998), and Monetary Conditions Index (MCI)—which is the focus of this paper—constructed by and used by Bank of Canada [Freedman (1995)], taking into consideration the interest rate and exchange rate channel of monetary policy transmission mechanism in a small open economy. In case of open economy it is assumed that the monetary policy affects the economy and the prime objective of monetary policy, rate of inflation, through two important transmission mechanisms. These transmission channels are; interest rate channel and exchange rate channel. The working of the first channel is that the interest rate influences the level of expenditures, investment and subsequently domestic demand. The change in official interest rate effects the market rates of interest both short term as well as long term interest rates. This change in market rates of interest is transmitted to the bank lending rates and saving rates. The change in saving rate effects the spending behaviour of individuals (consumption) whereas the change in bank lending rate effects the investment behaviour of firms (investment). The change in aggregate consumption and investment has direct link to the gross domestic product (GDP).

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Apergis, Nicholas, and Chi Keung Marco Lau. "How deviations from FOMC’s monetary policy decisions from a benchmark monetary policy rule affect bank profitability: evidence from U.S. banks." Journal of Financial Economic Policy 9, no. 4 (November 6, 2017): 354–71. http://dx.doi.org/10.1108/jfep-02-2017-0008.

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Purpose This paper aims to provide fresh empirical evidence on how Federal Open Market Committee (FOMC) monetary policy decisions from a benchmark monetary policy rule affect the profitability of US banking institutions. Design/methodology/approach It thereby provides a link between the literature on central bank monetary policy implementation through monetary rules and banks’ profitability. It uses a novel data set from 11,894 US banks, spanning the period 1990 to 2013. Findings The empirical findings show that deviations of FOMC monetary policy decisions from a number of benchmark linear and non-linear monetary (Taylor type) rules exert a negative and statistically significant impact on banks’ profitability. Originality/value The results are expected to have substantial implications for the capacity of banking institutions to more readily interpret monetary policy information and accordingly to reshape and hedge their lending behaviour. This would make the monetary policy decision process less noisy and, thus, enhance their capability to attach the correct weight to this information.

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Journal articles on the topic 'Federal Open Market Committee'

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