Financial Market Effects of FOMC Projections. Journal of Macroeconomics, 2021 (Draft)

Working Papers

Abstract: I document differences in interest rate expectations between central banks and the private sector. I then show why such a gap is a puzzle and offer several possible explanations for its existence. In particular, I find that at least some of this gap must be attributed to differences in beliefs about the central bank's reaction function. I also consider the macroeconomic implications of such a gap. First, I create a measure of central bank credibility by taking the absolute value of the difference in expectations. Then, I use this measure of credibility in an event study across several countries to demonstrate that a decrease in credibility can reduce the efficacy of forward guidance. In fact, I find that a gap of around 100 basis points can almost completely dampen the impact of the Federal Reserve's forward guidance.

Keywords: Credibility, Forward Guidance, Central Bank Projections, Market Expectations, Asset PricesJEL Codes: E52, E58, E44

Abstract: I examine whether vacancies on the Board of Governors of the Federal Reserve are costly. I find little evidence to suggest that this is the case: monetary policy, the level of uncertainty regarding the future path of monetary policy, and the Board of Governor's supervisory and communication responsibilities are largely unaffected by the number of absences on the committee. I show that this low cost has important implications for the nomination process from both the perspective of the president and the Senate.

Keywords: FOMC, Vacancies, Board of Governors, NominationsJEL Codes: E58, E52, D72

Abstract: Expectations about macroeconomic variables vary substantially by race, most notably between Black and White individuals. Our results suggest that one factor affecting the difference in expectations is that Black expectations are influenced by negative experiences with the criminal justice system. We find evidence for one channel through which these negative experiences influence expectations by showing that, relative to White respondents, Black respondents became more pessimistic about both their own economic circumstances and their inflation expectations following highly-publicized incidents related to police-involved killings. This suggests a channel through which non-economic events can affect the economy via their impact on consumer expectations.

Keywords: Police Killing, Racial Differences, Consumer ExpectationsJEL Codes: E30, D84, D14

Abstract: This paper examines the trading behavior of members of the Federal Reserve’s Federal Open Market Committee (FOMC). First, we calculate the financial market returns of FOMC members relative to the overall market and examine if there is any evidence of abnormal returns. Second, we test whether FOMC members exhibit evidence of market timing around monetary policy announcements. We do not find any evidence that FOMC officials select securities that earn abnormal returns. However, our results regarding market timing are mixed. Though we do not find any evidence of security selection or portfolio rebalancing with respect to monetary policy decisions, we do find that stock sales by FOMC officials are typically succeeded by negative returns in the overall stock market. 

Keywords: FOMC, Abnormal returns, Investment behavior of elected officialsJEL Codes: E58, G14, D72

Works in Progress

Policy Rule by Committee

Sectoral Heterogeneity in Interest Rate Expectations

Ownership Bias: Evidence from the Washington Post