Working Paper

Anticipations of monetary policy in financial markets

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.

Keywords: Financial markets; Monetary policy; Federal funds rate;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2001

Number: 2001-24