Forward guidance. Fed funds target during /15/2017

Transcription

1 Forward guidance Fed funds arge during 2004 A. A wo-dimensional characerizaion of moneary shocks (Gürkynak, Sack, and Swanson, 2005) B. Odyssean versus Delphic foreign guidance (Campbell e al., 2012) C. A 3-dimensional characerizaion of moneary shocks (Bauer, 2015) 1 2 FOMC Dec 9, 2003 meeing saemen: However, wih inflaion quie low and resource use slack, he Commiee believes ha policy accommodaion can be mainained for a considerable period. FOMC Jan 28, 2004 meeing saemen: Wih inflaion quie low and resource use slack, he Commiee believes ha i can be paien in removing is policy accommodaion. Jan_27 Jan_28 Jan FF Mar FF Aug FF y Treasury yr Treasury Gürkaynak, Sack and Swanson (2005) focused on narrow window 10 minues before o 20 minues afer a major Fed communicaion In recen daa communicaion ook he form of a saemen issued a he close of FOMC meeing June 25, 2003: Fed lowered arge from 1.25% o 1.00% (marke anicipaed migh have gone o 0.75%) 5 6 1

2 In earlier daa, Fed communicaed is plans wih an unanicipaed open marke operaion E.g., if Fed added reserves when he rae was below is previous arge, marke correcly inferred ha Fed had lowered is arge. 7 8 Colleced observaions on j 1,..., n changes in he price of n 11 differen asses in 30-minue inerval around communicaion for 1,...,T 138 differen communicaions. x 1 Kuner-adjused change in curren-monh fed funds fuures conrac x 2 change in 3-monh-ahead fed funds fuures Also change in 2-, 3-, and 4-quarer-ahead Eurodollar fuures, 3m, 6m, 2y, 5y, 6y Treasury nn row i, col j ij T 1 x i x i x j x j Facor srucure: nn nrrn diagonal nn vec,vec(diag nrn1 yields and S&P Use minimum chi-square o es for number of facors r T 1/2 vech( vech( L N0,V Elemen of V corresponding o covariance beween ij and m can be esimaed as v ij i jm im j (Hamilon 1994, p. 301). GSS insead use v ij T 1 T 1 x i x i x j x j ij x x x m x m m Minimum chi square: min Tvech vech V 1 vech vech minimum value achieved is asympoically 2 q for q nn1/2nr nrr 1/2 (las erm from rr 1/2 possible roaions of

3 Resul: rejec H 0 : r 1 fail o rejec H 0 : r 2 Conclusion: moneary policy surprises are a 2-dimensional objec. Can esimae space spanned by moneary policy surprises by 1, 2 firs wo principal componens of x Useful alernaive normalizaion: Q where 2 has no effec on x 1 and 2 is uncorrelaed wih Usual normalizaion: T 1 T 1 I 2 Would also hold for Q Q cos sin sin cos QQ I 2 x 1 Kuner-adjused change in curren-monh fed funds fuures convenional measure of moneary policy h 11 firs elemen of firs eigenvecor of loading of x 1 on 1 h 12 firs elemen of second eigenvecor of loading of x 1 on loading of x on is H n2 x H HQ Q H loading of x on is H HQ H H n2 Q h 11 sin h 12 cos h 12 cos sin sin cos In order for x 1 no o load on 2, we wan h 11 sin h 12 cos 0 h 12 Find, such ha sin cos h12 h 11 an 1 h 12 /h cos sin sin cos

4 Can furher normalize so ha h (one-uni shock o 1 raises fed funds arge by one basis poin) Normalize 2 so ha 1-year eurodollar fuures increases by 0.55 bp ( response of 1-year eurodollar o 1 GSS call 1 he "arge facor" and 2 he "pah facor" Noe his makes 1 close o x 1 bu no idenical o x 1 ( 1 is inference based on full vecor x B. Odysseanversus Delphic foreign guidance (Campbell e al., 2012) 2-year rae jumped 17 bp on Jan 28, 2004 when Fed replaced policy accommodaion can be mainained for a considerable period wih he Commiee believes ha i can be paien in removing is policy accommodaion. Is his Odyssean? Fed is promising o raise raes soon Or is i Delphic? Fed is predicing i is going o raise raes soon If Delphic Is Fed predicing is fuure policy shock? Or is Fed passing along is superior informaion abou he economy?

5 Campbell, e al. sudied correlaion beween GSS pah facor in 30-minue inerval around FOMC saemen and monh-o-monh change in Blue Chip forecas A saemen ha increased ineres raes was associaed wih marke expecaions of increased inflaion and decreased unemploymen Inerpreaion: ypically we observe Delphic componen (Fed has superior informaion abou economy) quarerly r 1 r 1 2 r u u u M j0 v j,j v,0 decided a v 1,1 decided a 1 v M,M decided a M v v 0,v 1,...,v M new decisions a v serially uncorrelaed r 1 r 1 2 r u u u M j0 v j,j Expecaion a M r M 1 r 1 M 2 r 2 M M u û M û M v M,M Expecaion a M1 r M1 1 r 1 M1 2 r 2 M M1 u û M1 û M1 v M1,M1 v M,M Difference r M1 r M 1 r 1 M1 r 1 M 2 r 2 M1 r 2 M M1 M u û M1 û M û M1 û M v M1,M1 We observe: r j1 r j from change in fed funds fuures j1 j and û j1 û j from revision in Blue Chip forecas û j1 from revision in Blue Chip longrun forecas û j we observe v j,j for j 0, 1,..,M

6 Esimae parameers by GMM FOMC communicaes 40% of variance of shock 1 quarer ahead and anoher 40% in 3 quarers before ha C. A 3-dimensional characerizaion of moneary shocks (Bauer, 2015) Esimaed Dynamic Nelson-Siegel model using daily daa on Fed funds fuures over each of he nex 4 monhs Eurodollar fuures conracs for each of he nex 14 quarers Zero-coupon Treasury yields 6m, 12m, 18m, 2y, 3y, 10y Gives summary of enire yield curve for every day along wih erm premium and expecaions componens Allows for heeroscedasiciy by grouping days by kind of news release (e.g., moneary policy release days have differen variance marix from ohers) Allows us o summarize how enire yield curve changes in response o any given day s news Example: FOMC saemen March 22, 2005 Fed announced 25 bp increase This had been fully anicipaed, curren fuures conrac unchanged Added hawkish forward guidance pressures on inflaion have picked up in recen monhs

7 Response of yield curve o FOMC saemen Mar 22, 2005 (revision = change in expeced fuure shor raes) Response of yield curve o Bernanke announcemen Dec 1, 2008 ha Fed was likely o purchase longer erm securiies in subsanial quaniies Horizonal axis: quarers for lef panel, years for second and hird Model prediced coefficiens (solid curve) and R 2 (crosses) from Kuneresimaes esimaes of effecs of moneary policy shocks and direc esimaes (circles wih confidence bars) Change in yield curve June 5, 2009 (marke expeced drop in nonfarm payrolls of 500,000, acual drop was 345,000) 39 Horizonal axis: quarers for lef panel, years for second and hird 40 Model prediced responses (solid curve) o a one-sandard deviaion surprise in macro release and direc esimaes (circles) (horizonal axis = quarers) Model prediced responses (wih 95% confidence inerval) of expeced fuure shor raes o a one-sandard deviaion surprise in macro release (horizonal axis = quarers)