Joint discussion paper series in economics 2009,25
We explain changes in the federal funds target rate using macroeconomic variables and Federal Open Market Committee (FOMC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 75 target rate decisions between 1998 and 2006. We find, first, that FOMC communication is forward-looking, with a horizon that goes beyond the next meeting. Second, our communication indicators significantly explain target rate changes and improve explanatory power in and out of sample. Third, speeches by members of the Board of Governors and regional presidents have a statistically significant and equal-sized effect, whereas the less-frequent monetary policy reports and testimonies are insignificant. Fourth, our findings are robust to variations in the specification, including changes in the communication strategy as well as a measure of unambiguous communication. Finally, our communication indicator based on FOMC speeches performs better in explaining rate changes than do newswire reports of Fed communications.
Central Bank Communication Federal Reserve Bank Interest Rate Decision Monetary Policy Federal Funds Target Rate Taylor Rule