How Do FOMC Projections Affect Policy Uncertainty?

Bundick, Brent; Herriford, Trenton

doi:10.18651/er/2q17bundickherriford

Cited by 7 publications

(5 citation statements)

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“…6 Despite these differences, these alternative PDF measures are highly correlated with our EDX measures, leading to similar regression coefficients. 7 These results illustrate that our findings are robust to alternative measures of term 5 Specifically, we use the method outlined in the Technical Appendix of Bundick and Herriford (2017) to construct the probability density function using Eurodollar options. We measure uncertainty using the standard deviation of the market-implied probability density function.…”

Section: Alternative Specifications and Other Measures Of Policy Shocksmentioning

confidence: 66%

“…For these results only, we compute our level factor L P DF t and slope factor S P DF t using PDF-implied measures of interest rate uncertainty rather than our EDX measures constructed using the VIX methodology. See Bundick and Herriford (2017) for additional details on estimating market-implied densities. We use the same principal components method as in our baseline results to generate the implied level and slope factors.…”

Section: Discussionmentioning

confidence: 99%

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Forward Guidance, Monetary Policy Uncertainty, and the Term Premium

Bundick¹,

Herriford²,

Smith³

2017

RWP

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When the Federal Reserve provides greater clarity about the path of future interest rates, term premia in longer-term bonds fall and economic activity increases. This interest rate uncertainty channel of forward guidance sheds light on three important issues in macroeconomics. First, this channel explains how forward guidance shapes term premia, both away from and at the zero lower bound. Second, our mechanism offers a novel explanation for the puzzling fact that monetary policy announcements affect distant real forward rates. Finally, we show that event studies overstate the effects of large-scale asset purchases when they fail to control for simultaneous forward guidance.

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Section: Alternative Specifications and Other Measures Of Policy Shocksmentioning

confidence: 66%

Section: Discussionmentioning

confidence: 99%

Forward Guidance, Monetary Policy Uncertainty, and the Term Premium

Bundick¹,

Herriford²,

Smith³

2017

RWP

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“…Here we summarize some of the more recent work. Bundick and Herriford (2017) measure uncertainty about future interest rates in 1-day windows around FOMC meeting dates using Eurodollar options prices, finding that interest rate uncertainty fell after interest rate projections began to be released. However, uncertainty increases when there is more disagreement in the participants' projections.…”

Section: Effects On Private Sector Expectationsmentioning

confidence: 99%

Central bank forecasting: A survey

Binder

Sekkel

2023

Journal of Economic Surveys

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Central banks' forecasts are important monetary policy inputs and tools for central bank communication. We survey the literature on forecasting at the Federal Reserve, European Central Bank, Bank of England, and Bank of Canada, focusing especially on recent developments. After describing these central banks' forecasting frameworks, we discuss the literature on central bank forecast evaluation and new tests of unbiasedness and efficiency. We also discuss evidence of central banks' informational advantage over private sector forecasters, which appears to have weakened over time, and how central bank forecasts may affect private sector expectations even in the absence of an informational advantage. We discuss how the Great Recession led central banks to evaluate their forecasting frameworks, how the Covid‐19 pandemic has further challenged central bank forecasting, and directions for future research.

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“…Finally, the second and third rows of Table 1 show that the term structure of interest rate uncertainty shifted lower and flattened during the 2009-2015 zero lower bound period, likely reflecting not only the truncation of downside interest rate uncertainty by the zero lower bound but also the FOMC's increased transparency. Swanson (2006) and Bundick and Herriford (2017) document that greater transparency reduces market-implied interest rate uncertainty. To this point, Figure 1 shows that the flattening of the term structure of interest rate uncertainty persisted after rates were lifted from zero in late 2015.…”

Section: Measuring Option-implied Interest Rate Uncertaintymentioning

confidence: 99%

The Term Structure of Monetary Policy Uncertainty

Bundick¹,

Herriford²,

Smith³

2022

RWP

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This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but, instead, are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing in just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy SVAR setting, which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.

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How Do FOMC Projections Affect Policy Uncertainty?

Cited by 7 publications

References 0 publications

Forward Guidance, Monetary Policy Uncertainty, and the Term Premium

Forward Guidance, Monetary Policy Uncertainty, and the Term Premium

Central bank forecasting: A survey

The Term Structure of Monetary Policy Uncertainty

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