Keywords: Transparency, liquidity effect, announcement effect, anticipation effect
Abstract: The Federal Reserve (Fed) has maintained a general trend toward increased transparency and gradualism.
This paper investigates the implications of these historical developments for the anticipation of
monetary policy actions and adjustment of interest rates. In a theoretical framework, we establish
the Fed's ability to manipulate overnight rates via an "anticipation" effect. The anticipation effect is
defined as interest rate adjustments that take place prior to a policy announcement (or prior to when the
complementary open market operations associated with that policy action take place) due to market's improved
ability to predict future policy actions. Our empirical results document that most market rates adjust to
anticipated policy actions prior to the actual announcement. Because the market responds to policy announcements
instantly, the Trading Desk does not need to act immediately after the target change and can wait until the
market incorporates the new information that comes with the policy announcement.
Full paper (1044 KB PDF)
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Last update: December 13, 2001