The Fed Information Effect: Is It Real?


High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent authors have found that these shocks have puzzling effects on private-sector forecasts of inflation, unemployment, or real GDP that is opposite in sign to what standard macroeconomic models would predict; they argue this is evidence of a ‘Fed information effect’ channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. We show that these empirical results are also consistent with a ‘Fed response to news’ channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. We provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, (i) high-frequency stock market responses to Fed announcements, (ii) a new survey that we conduct of individual Blue Chip forecasters, and (iii) regressions that include the previously omitted public macroeconomic data releases all indicate that the Fed and forecasters are simply responding to the same public news, and that there is little if any role for a ‘Fed information effect’.

Nov 5, 2019 3:00 PM
Short research talk at the University of Hamburg
Michael D. Bauer
Financial Economist

My research areas are financial economics, monetary economics and time series econometrics.