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Working Paper
Evaluating Macroeconomic Outcomes Under Asymmetries: Expectations Matter
Asymmetries play an important role in many macroeconomic models. We show that assumptions on household and firm expectations play a key role in determining the effects of these asymmetries on macroeconomic outcomes. If households and firms have perfect foresight and hence do not account for the possibility of future shocks, then the implied longer-run averages and distributions for unemployment and inflation can differ significantly from their rational expectations counterparts. We first derive this result analytically under either an asymmetric monetary policy rule or a nonlinear Phillips ...
Journal Article
Introducing the Kansas City Fed's Measure of Policy Rate Uncertainty (KC PRU)
Monitoring uncertainty around the future path of interest rates can help ensure that monetary policy is transmitting to the economy as intended. Because uncertainty is not directly observable, measuring uncertainty about the future policy rate can be difficult. Previous measures often face two key limitations. First, they may be released with a lag, making them less useful as a timely measure of policy rate uncertainty. Second, they may not be available over a long sample, making it difficult to compare measures of current uncertainty with historical context.In this article, Brent Bundick, A. ...
Working Paper
Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19
This paper provides evidence that inflation targeting delivered anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. We then evaluate these predictions using high-frequency financial market data from nine advanced economies and illustrate three main findings. First, inflation expectations embedded in asset prices were just as well, or in some countries better anchored, after the pandemic. Second, ...
Journal Article
Does the Recent Decline in Household Longer-Term Inflation Expectations Signal a Loss of Confidence in the FOMC?
Households have lowered their longer-term inflation outlooks, but they appear confident in the FOMC?s ability to achieve stable prices.
Working Paper
Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19
This paper provides evidence that inflation targeting delivered well-anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we first illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. Then, we evaluate these predictions using high-frequency financial market data from nine advanced economies. Specifically, we examine whether inflation expectations embedded in asset prices remained anchored as inflation climbed in the aftermath of the pandemic. Our ...
Journal Article
How Do FOMC Projections Affect Policy Uncertainty?
In January 2012, the Federal Open Market Committee (FOMC) began publicly releasing its participants? projections for the future value of the federal funds rate. The former FOMC Chair Ben Bernanke stated that these releases help the public form policy expectations. However, Federal Reserve Bank of San Francisco President John C. Williams noted that the range of the funds rate forecast conveyed disagreement and uncertainty. These projections may be conflicting in nature, and thus may not lower public uncertainty. Bundick and Herriford seek to answer the question: do these projections decrease ...
Journal Article
How Do Financial Markets Perceive the Balance of Risks to the Policy Rate?
We introduce a new measure of policy rate skew that uses interest rate options prices to summarize market-perceived risks to future short-term interest rates. A positive value of policy rate skew indicates financial markets believe interest rates are more likely to end up higher than projected, whereas a negative value suggests rates could end up lower than projected. As of October 2024, our measure of policy rate skew is near zero, suggesting market-perceived risks to the interest rate outlook are roughly in balance.
Working Paper
Forward Guidance, Monetary Policy Uncertainty, and the Term Premium
We examine the macroeconomic and term-premia implications of monetary policy uncertainty shocks. Using Eurodollar options, we employ the VIX methodology to measure implied volatility about future short-term interest rates at various horizons. We identify monetary policy uncertainty shocks using the unexpected changes in this term structure of implied volatility around monetary policy announcements. {{p}} Two principal components succinctly characterize these changes around policy announcements, which have the interpretation as shocks to the level and slope of the term structure of implied ...
Journal Article
Estimating the monetary policy rule perceived by forecasters
Brent Bundick examines whether the FOMC?s implicit monetary policy rule, as perceived by professional forecasters, changed when the federal funds rate reached its effective lower bound.
Working Paper
Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications
High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical ...