FOMC Communications and the Predictability of Near-Term Policy Decisions

Sep 21, 2026

Uploaded by Asher

The text examines how FOMC communications through post-meeting statements evolved and how that evolution affected the predictability of near-term policy decisions. It describes a shift from vague public communication in the early 1990s—where market participants inferred intentions from Trading Desk behavior—to a more transparent approach beginning in February 1994. Using fed funds futures prices, it reports a marked improvement in market participants’ ability to anticipate future FOMC decisions, especially over two- to three-month horizons, while noting that improved communication does not eliminate the possibility of surprises.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

FOMC Communications and the Predictability of Near-Term Policy Decisions

The Evolving Apparatus

Futures Market

by John B.Carlson,Ben Craig,Patrick Higgins,and William R.Melick I guess I should warn you,ifl turn out tobe particzularly clear;you've probablymisunderstood what I've said. Alan Greenspan Pormer Fed Chairman AlanGreenspan is well known for his slysense of humor.The famous quotebelies one of the greatest legacies of histenure—improved central bank commu-nication and transparency.Under hischairmanship,the Federal Open MarketCommittee(FOMC)gradually devel-oped an apparatus to clearly and openlycommunicate its decisions and expecta-tions.This communications apparatus islargely—though not solely—character-ized by the FOMC practice of releasinga carefully crafted statement after eachmeeting—a practice that will likelycontinue to evolve. Current Fed Chairman Ben Bernankerecently emphasized the importance ofgreater transparency and openness onthe part of the FOMC.He notes that inthe very short run,clear communicationimproves the near-term predictability ofFOMC rate decisions,which in turnreduces risk and volatilityin financialmarkets.Moreover,he argues that clearcommunication enhances the effective-ness of policy in the long run by helpingto align the expectations of financialmarket participants more closely withthe FOMC's own plans and projections. The behavior of financial markets fol-lowing the persistent series of rate hikesthat began in 2004 illustrates ChairmanBernanke's pointThis period has beencharacterized by low financial marketvolatility,especially in U.S.Treasurybond markets,and the remarkable abilityof market participants to anticipateFOMC policy moves.This behaviorcontrasts sharply with that which fol- # FOMC Communications and thePredictability of Near-Term Policy Decisions lowed a similar policy tightening episodein 1994.With a communications appara-tus still in its infancy,bond markets wereroiled by an inability to fully anticipate1994 FOMC policy moves. Below,we first briefly describe the keymilestones in the evolution of the FOMCpost-meeting statement.To assesswhether or not the changes in the state-menthaveimproved near-term pre-dictability of FOMC interest rate deci-sions,we look at evidence based onprices taken from the futures contract onthe overnight federal funds interest rateOver the past decade,these prices showa dramatic increase in the ability of mar-ket participants to predict future FOMCdecisions,especially over horizons oftwo and three months.However,it is notpossible to conclude that all of the gainsin predictability are a direct result ofimproved communications and,moreimportantly,improved communicationdoes not rule out the possibility of largesurprises in future FOMC rate changes. ## ■ The Evolving Apparatus It is useful to recall how vaguely FOMCpolicy decisions were once communi-cated to the public.In the early 1990s,forexample,no systematic post-meetingstatements were issued.After FOMCmeetings,the intended level,or target,ofthe federal funds rate that had been cho-sen by the voting members wasconveyedin a directive to the Trading Desk at theNew York Fed,much as it is done today.The Desk in tum conducted daily openmarket operations in a manner that wouldachieve the fed funds targeton averageover an intermeeting period.But marketparticipants learned about intended fedfunds rate changes only by inferring themfrom the actions of the Trading Desk. In the absence of a post-meeting com- In February 1994,the FOMC began anew era in transparency,graduallybuilding a communications apparatusthat conveys information about theCommittee's decisions and expecta-tionsHas the new apparatusimproved the public's ability to pre-dict FOMC interest rate decisions?New research based on the prices offed funds futures shows that over thepast decade,it has,especially overhorizons oftwo to three months. munication,market participants lookedfor consistent patterns in the behavior ofthe Desk,from which they extractedFOMC intentions.To minimize lossesassociated with interest rate changes.large commercia

FAQs

How did FOMC communication work in the early 1990s?

After meetings, the chosen federal funds rate target was conveyed to the Trading Desk at the New York Fed, and market participants had to infer likely changes from the Desk’s actions.

What milestone occurred in February 1994 in FOMC transparency?

The FOMC began a new era of transparency with an initial post-meeting press release describing a slight increase in reserve pressure and expectations for short-term money market interest rates.

Do improved communications guarantee no surprises in future FOMC rate changes?

No. Even though predictability improved, the text states it is not possible to conclude that all gains come directly from communications and that large surprises remain possible.

Sep 21, 2026

Uploaded by Asher