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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Making News: Financial Market Effects of Federal Reserve Disclosure Practices
Antulio N. Bomfim and Vincent R. Reinhart
2000-14


Abstract: As recently as early 1994, market participants had to infer the stance of U.S. monetary policy according to the type and size of the open market operations conducted by the Federal Reserve's Trading Desk. Thus, investors were exposed to uncertainty about both the timing and the motivation for monetary policy actions. Since then, changes in disclosure practices regarding monetary policy decisions have potentially mitigated both types of uncertainty. We examine the effects of the greater openness and transparency of these new practices on the way a wide array of financial market instruments respond to unanticipated policy decisions. In general, the financial markets' response to policy does not seem to be related to what the Federal Reserve says after a surprise decision is announced or to when it decides to act. The invariance of the response of asset prices to policy across time and announcement regimes suggests that what the Federal Reserve says when it acts is of second-order importance to the act itself.

Keywords: Monetary policy transparency, expectations, asset prices

Full paper (333 KB PDF)


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Last update: March 17, 2000