How farsighted is the FOMC?

The most difficult problem facing monetary policymakers results from the long and variable lags in monetary policy's impact on the economy. The full effect of an interest rate change today is not realized for several quarters, so monetary policymakers must be forward-looking. Yet, it is difficu...

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Bibliographic Details
Published inNew England economic review p. 49
Main Author Tootell, Geoffrey M.B
Format Journal Article
LanguageEnglish
Published Boston Federal Reserve Bank of Boston 01.01.1997
Subjects
Analysis
Congressional committees
Economic conditions
Economic impact
Federal funding
Federal funds rate
Federal Reserve monetary policy
Free markets
Inflation
Interest rates
Monetary policy
Probability
Studies
Unemployment
Variables
United States > US
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Summary:The most difficult problem facing monetary policymakers results from the long and variable lags in monetary policy's impact on the economy. The full effect of an interest rate change today is not realized for several quarters, so monetary policymakers must be forward-looking. Yet, it is difficult enough to interpret how the economy is doing now, let alone forecast how it will be performing one year hence. This uncertainty hinders the ability of policymakers to offset future fluctuations with current actions. Even so, the lags leave central bankers no choice but to react to their expectations about the future. The extent to which the Federal Open Market Committee (FOMC) reacts to forward-looking data is examined. It is shown that the FOMC does look into the future, basing its decisions on expectations about the economy at least as far as a year away. The effects of forecast uncertainty on the farsightedness of the FOMC are also analyzed. It is found that the FOMC's reaction depends on the relative uncertainty cross forecast horizons, which can change over time.
ISSN:0028-4726
2163-5986