Speech

Getting Markets in Synch with Monetary Policy FirstAnnualMissouriEconomicsConference UniversityofMissouri–Columbia Columbia,Missouri May4,2001 Prices in speculative markets respond inthetargetratewaslessthansomemarketana- sensitively to all kinds of events, lystshadhopedfor.Perhapsasaconsequence, including policy actions and fre- onthedayofthepolicyaction,theDowJones quently even hints of policy actions. Industrialaveragedeclined2.4percentandthe The response of markets to policy actions has S&P500andtheNasdaqdeclined2.4and4.8 fascinated me for a long time. This fascination percent,respectively. only intensified after I became president of the Aboutamonthlater,onApril18,2001,the St. Louis Fed. The markets I am referring to FOMCagainreducedthefundsratetargetby50 includetheequity,bond,commodity,andforeign basispoints.Thisactionoccurredduringthe exchange markets. Although I think of policy intermeetingperiodandtookthemarketcom- actions in the broad sense, this afternoon I will pletelybysurprise.Althoughthemarkethad limit my discussion to Federal Reserve policy pricedina50basispointcutattheforthcoming actions. My discussion today is an application May15FOMCmeeting,essentiallynopartofthe of, and further development of, an argument I April18intermeetingmovewaspricedintothe first outlined in a speech in Philadelphia in federalfundsfuturesrateatthattime.Inthiscase, August 1999. thestockmarketreactedpositively,withtheDow Beforeproceedingfurther,Iwanttoacknowl- increasingby3.9percentthatdayandtheS&P edgethevaluablecommentsprovidedbymy 500andtheNasdaqincreasingby3.9and8.1 colleaguesattheFederalReserveBankofSt.Louis, percent,respectively. especiallythosebyDanielThornton,vicepresi- Theequitypriceresponsesillustrateapoint dentintheResearchDivisionattheBank,and thatIbelieveistruemoregenerally:Policy- RobertRasche,directorofResearch.However,I inducedmarketresponsesareunproductive acceptfullresponsibilityforerrors.Theviews exceptincertaincircumstances.Indeed,Iwill expressedaremineanddonotnecessarilyreflect attempttoconvinceyouthatmonetarypolicy officialpositionsoftheFederalReserveSystem. worksbestwhenFedpolicyactionsarecompletely Thefactthatmarketsreacttoinformation anticipatedbythetimetheyoccur—thatis,when aboutmonetarypolicyisillustratedbythestock policyactionsareanoneventinthemarkets. market’sreactiontothelasttwoFedpolicyactions. Thecorollarytothispropositionisthatlarge AtitsregularlyscheduledmeetingonMarch20, marketresponsestomonetarypolicyactionor 2001,theFederalOpenMarketCommittee inactioncanrepresent,dependingoncircum- (FOMC)reducedthetargetforthefederalfunds stancesandatleasttosomedegree,apotential rateby50basispoints.Thisactionwaswidely failingofmonetarypolicy.Ofcourse,market anticipated,astheentire50basispointsmove reactionstonewsarepartoftheAmericanland- waspricedintothefederalfundsfuturesrateat scape.Theywillnotbeeliminatednomatterhow thecloseofbusinessthedaybefore.Whilethis hardtheFedattemptstoconveyitsintentionsto actionwaswidelyanticipated,thesizeofthecut thepublic.Ihopetoconvinceyouthataligning 1 MONETARYPOLICYANDINFLATION marketexpectationswithpolicyshouldbean marketprices.Thispointiswellunderstoodby importantcentralbankobjective,eventhoughit mostmarketparticipantsandmostinthefinancial willneverbefullyachieved.Tobeveryexplicit press. aboutapointI’vemadeaboveimplicitly,Ido notbelievethatallreactionstochangesinthe fundsratetargetrepresentafailingofmonetary MONETARY POLICY ACTIONS policy.Sometimesthemarketgetsitwrongno Nowconsidertheinteractionsofspeculative matterhowhardtheFedtries.TheFedhasa marketswithmonetarypolicyactions.Market responsibilitytogetpolicyrightevenifdoingso participantsaretryingtoforecastthefuture,and surprisesthemarket. sotheyarenaturallyinterestedinwhattheFed Thisargumentmotivatesthetitleofmy istryingtodo.Iwillnowmaketheassumption— speechtoday:“GettingMarketsinSynchwith whichIthinkisaccurate,butwillnotdiscuss MonetaryPolicy.”Thisisalsothetitleofthe furtherhere—thatthegoaloftheFederalReserve St.LouisFed’sannualeconomicconferencethis istokeeptherateofinflationlowandsteady,a year,tobeheldattheBankonOctober11to12, goalthatI’llcall“pricestability.”Insofaraspos- 2001.Ourhopeisthatthisconferencewillgive sible,givenitspricestabilitygoal,theFedalso usbetterinsightintohowwemightgetmarkets wantsitspolicyactionstocontributetothesta- moreinsynchwithmonetarypolicy. bilityofemploymentandoutput.Ibelievethat pricestabilitywill,ifanything,yieldloweraver- ageunemploymentthanwouldbeachievedat THE EFFICIENT MARKETS higherinflation.Hence,whenpolicymakerspur- PARADIGM suestableprices,theysimultaneouslypursuethe Theefficientmarketsparadigmisatthecore goalofmaximumsustainableeconomicgrowth. ofmybelief.Accordingtotheefficientmarkets Consequently,IassumethattheFed’sprimary hypothesis,speculativemarketsrespondeffi- goalispricestabilityanditssecondarygoalis cientlyasmarketparticipantsassessallrelevant stabilityofoutputandemployment,totheextent information.Absolutelyeverythingthatmight possible. influencemarketsisreflectedinmarketprices. MarketsmustnotonlyassesstheFed’sgoals, Giventhatinvestorsbidcurrentpricestolevels butthelikelihoodtheFedwillbeabletoachieve atwhichrisk-adjustedexpectedratesofreturn them.Consequently,forthesakeofmakingmy areequalizedacrossvariousinvestmentalterna- point,IalsoassumethattheFedcanachieveits tives,eachnewpieceofinformationmaymove goalsbymakingadjustmentstoitspolicyinstru- marketprices.Theefficientmarketsmodelisnot ment.TheFed’spolicygoalsandproceduresare perfect,butitcertainlygoesalongwaytoexplain keypiecesofinformationthathelpmarketpartici- thebehaviorofspeculativeprices. pantspredicthowtheFedwillrespondtonew Marketsrespondtotheflowofallsortsof information. information,includingthatfromthecentralbank. TheFed’sprincipalpolicyinstrument—and FederalReservepolicyactionsandstatements Iwillassumeitsonlypolicyinstrument—isthe byFederalReserveofficials—especiallythe federalfundsrate.Thefinaloutcomeofeach chairman—affectmarketexpectationsand, meetingoftheFOMCisitsdecisiononthetarget, therefore,marketprices. orintended,federalfundsrate.Inamannersimilar Ofcourse,onlynewinformationmatters. toefficientmarkets,policymakerssettheirpolicy Everythingthatisknownorcouldbepredicted instrumentatalevelconsistentwiththeirpolicy hasalreadybeenbidintomarketprices;onlythe objective,givenalloftheinformationavailable reportscomingacrossthewiresthatchangethe atthetime.OnlyinastaticworldwouldtheFed probabilitiesoffutureoutcomesaffectcurrent keepthefundsrateconstantforever.Asnewinfor- 2 GettingMarketsinSynchWithMonetaryPolicy mationcomesinabouttheeconomy,policymak- thatpolicymakerswillwaittoolongbeforeacting. ersevaluatetheinformationanddecidewhether Nowconsiderthemarkets’reactiontopolicy ornottochangethesettingofthepolicyinstru- actions.Atthispoint,let’sassumethatthemar- ment.MarketsanticipatethattheFedwilladjust ketsandtheFedgetthesameinformationatthe thefundsrateinresponsetonewinformation sametime—neitherhasaninformationaladvan- abouttheeconomyinamannerconsistentwith tage.Itiseasytoseethenatureoftheexpectational itspolicyobjective.Theimportantquestionis equilibriuminsuchanenvironment.Ifthemarkets whenandbyhowmuchwilltheFedchangethe knowtheFed’spolicyobjectivesandwhatpolicy federalfundsrate? adjustmentsareappropriategiventhenewinfor- FOMCmembersareconstantlyexamining mation,themarketsandtheFedhaveacommon theflowofincominginformationonthestateof response.EachtimetheFOMCmeets,themarkets theeconomyanddecidingwhatpolicyactions knowwhatpolicyadjustment,ifany,isnecessary maybenecessarytokeeptheeconomyonthe anddesirable.WhentheFedadjustspolicy desiredtrack.Theimplicationsofaparticular accordingtoitsobjectivesandtheinformationit eventorpieceofnewsforpolicyarerarelyper- hasreceivedsincethelastmeeting,nooneis fectlyclear.Foronething,individualFOMCmem- surprised—theFed’sactionisanoneventtothe bersmayhavedifferentinterpretationsofthe markets.Themarket’sexpectationisfulfilled incomingflowofdataandtheappropriatepolicy becausethemarketandtheFedhaveinterpreted responses.Moreover,informationtendstoarrive thesameinformationthesameway. in“packets,”notinindividualpieces.Eachday IftheFOMCactsasthemarketexpects,the bringsnewinformationonavarietyofvariables. FOMC’sactionswillnotthemselvesbeinforma- Theresponsetoaparticularpieceofinformation tionandwillelicitnoadjustmentofmarketprices. isalwaysconditionaloninformationaboutother Thoseadjustmentswillhavealreadytakenplace variables—thepolicyrelevanceofafallinequity duringtheperiodbetweenFOMCmeetingsas prices,forexample,isdifferentwhenothereco- themarketsrespondtothesteadyflowofnew nomicindicatorssuggesttheeconomyisstrong informationintheformoftheemploymentreport, thanwhensuchindicatorssuggesttheeconomy housingstarts,productivity,employmentcost maybeweakening.Economicsprovidesconsid- erableguidanceonhowpolicymakersshould index,etc. respond,butthetimingandsizeoftheresponse isfrequentlyunclear.Indeed,insomeinstances eventheappropriatedirectionofpolicyactionis SYNCHING MARKETS AND unclear. POLICY Despitetheselimitations,itisconvenientto AnenvironmentwheremarketsandtheFed thinkaboutpolicyasif,inprinciple,thereisa respondinthesamewaytothesameinformation correctpolicyresponsetonewinformationthat isclearlyidealized,butIbelieveitistheenviron- comesinduringtheintermeetingperiod.Thejob menttheFOMCshouldbestrivingtoachieve. oftheFOMCistoevaluatethisinformationand Pricestabilityisdesirablebecauseavoiding dialintheappropriateresponseatitsnextmeet- ing.Theappropriateresponseisoftentokeepthe inflationsurprisesaddstotheefficiencyofthe fundsratesteady.Indeed,Ibelievethatoneof marketeconomyandpromotesmaximumsus- thegreatestbenefitsthatahighdegreeofmarket tainableeconomicgrowth.Ofcourse,wecannot confidenceintheFedaffordsisthatitenables avoidallsurprises.Bynature,thefutureisunpre- theFedtowaituntilnewinformationmakesit dictable.Theseunpredictableeventsinclude quiteclearwhatpolicyactionisappropriate.Of naturaldisturbances,suchasearthquakesand course,giventhelagsintheeffectsofmonetary floods,politicaldisturbancesathomeandabroad, policyontheeconomy,thereisalwaysadanger manychangesintastesandtechnology,andso 3 MONETARYPOLICYANDINFLATION forthandsoon.Marketsrespondefficientlyto Thereareanumberofexamplesthatillustrate thesedisturbancesmostofthetime. howmakingsurethemarketunderstandspolicy- Nearlyeveryonebelievesthat,whenpossible, makers’intentionsimprovestheresponse.Iwill monetarypolicyshouldoffsetshockstoprevent mentiononlytwo.Inthemid-1960s,theBoard themfrompushingtheeconomyawayfromprice ofGovernorsbeganstatingwhythediscountrate stability.Alesswell-recognizedwaythatmonetary waschangedwhenitannouncedadiscountrate policycancontributetothegoalofmaintaining change.Frequently,thediscountratewaschanged pricestabilityistopreventmonetarypolicydis- simplytobringitintoalignmentwithmarket turbancespersefromadverselyaffectingprice ratesthathadchanged.Wenowknowthatwhen stability. ratealignmentwastheonlyreasonthattheBoard Myanalysisassumesthatpolicymakers’goals gaveforthediscountratechange,marketrates andthepublic’sgoalsarethesame.Whenthey didnotrespond,whichisjustastheFedintended. aredifferent,policymakersmayhaveanincentive However,whentheBoardgavesomeotherreason tosurprisethemarket.Whenthegoalsarethe forthechanges,marketratesrespondedsignifi- same,however,itisdifficulttoconceiveofsitu- cantly.Priortothemid-1960s,theBoardsimply ationswherepolicymakershaveanincentiveto announceddiscountratechangesandthemarket surpriseorfoolthepublicjustforthesakeofsur- respondedsignificantlyevenwhentheBoard priseitself.Surprisesmaysometimesbenecessary wassimplyrealigningthediscountratetomarket togetpolicyright,andarethereforeunavoidable, rates.Hence,whentheBoardwasnotclearabout buttheyarenotinandofthemselvesdesirable. itsintentionswhenchangingthediscountrate, FormanyyearsnowtheFedhaspursuedthe marketratesrespondedevenwhenthechangein goalofpricestabilitywithgenuineconviction.I thediscountratewasnotmotivatedbypolicy believethatsocietysharesthegoalandunder- considerations. standsandappreciatesthatconviction. AsecondexampleoccurredonDecember3, Idon’treallybelievethatthecoincidenceof 1990,whentheBoardofGovernorsannounced policymakers’goalsandthepublic’sgoalsisan that,effectiveDecember13,1990,itwasreducing assumption.Inademocraticsociety,Iaminclined from3percenttozeropercentthereserverequire- tothinkthatitisimpossibleforacentralbankto mentoncertainnonpersonaltimedepositsand pursuelong-rungoalsthatarenotacceptableto eurocurrencyliabilities.Theeffectofthisaction societyatlarge.Thisdoesnotmeanthatsociety wastoreducereserverequirementsbyatotalof immediatelyacceptsthecentralbank’sgoals. about$13.2billion.TheBoardhadgivennoindi- Thereislikelytobesomelearningonbothsides. cationthatitwasgoingtotakethisstep.Even ThepointIwanttomakehereisthatthe manyinsidetheFederalReserveweresurprised marketsandtheFedcannotconvergeonacom- bytheaction.Asaresultofthissurpriseaction, monunderstandingofthedirectionofmonetary thefederalfundsratewashigherandgenerally policyiftheFeddoesnotpursueitsgoalsina morevolatileforabouttwoandahalfmonths,as consistentfashionovertime.Thejobofthecen- banksadjustedtotheirnewcircumstance. tralbankistomaintainaclearfocusonprice Incontrast,onFebruary18,1992,theBoard stabilityandtoconveythatfocustothemarkets. announcedthatthereserverequirementon Thecentralbankandthemarketscanthenrespond transactionsdepositswouldbereducedfrom12 inidenticalfashiontotheflowofincoming percentto10percenteffectiveApril2,1992.This informationbecausetheyreachthesameconclu- actionreducedtotalreserverequirementsby sionabouttheimplicationsoftheinformation nearly$9billion.Inthiscase,however,thechange formonetarypolicy.Inthisenvironment,market wasannouncedwellinadvanceofitseffective participantsarenotsurprisedbytheFed’saction date,givingbanksadequatetimetopreparefor becausetheyalsoknowwhatneedstobedone. thenewcircumstance.Asaresult,therewasno 4 GettingMarketsinSynchWithMonetaryPolicy markedchangeinthelevelorvariabilityofthe Therehavealsobeenoccasionswhenpolicy federalfundsrate. tookwrongturns,suchasthe1971policyofcom- Ithinkthisidealizedpicturetakesusalong prehensivewageandpricecontrols.Iinclude waytowardunderstandinghowmonetarypolicy thiscasebecausetheintroductionofwageand andthemarketsshouldinteractwhenpolicyis pricecontrolshadmonetarypolicyimplications. onasuccessfultrack.Inthisenvironment,the Manyobservers,includingsomepolicymakers, Fedandthemarketsareinsynch.Withcomplete thoughtpricecontrolswouldtakecareofinflation synchronization,themarketsandtheFedhavea andpermitmonetarypolicytobemoreexpan- commonunderstandingoftheobjectivesofmone- sionary,todrivedownunemployment.Theunfor- tarypolicyandacommoninterpretationofthe tunatethingaboutboththe1971andthe1979 significanceofincominginformation. changesinpolicywasthattheyoccurredinthe MarketpricesthatanticipatewhattheFOMC firstplaceasaconsequenceofpolicygoingoff willdoareanecessaryingredientofeffective course. monetarypolicy.Regularityandpredictability Clearly,policymakerscansink(S-I-N-K)the markets,orsendthemintoorbitwhenasurprise areimportanttothesuccessofpolicy.Ifthepublic policyactionboostsmarketprices.Tome,sinking knowsthatpolicymakerswantstablepricesand ororbitingthemarketswillordinarilybeunde- willcarryouttheactionsnecessarytoachieve sirable.Amarketsurprisecanoccurbecausean pricestability,firmsandworkerswillbeless undesirablepolicyisbeingcorrected,orbecause inclinedtotakeactionsthatareinconsistentwith policyistakingoffinanunforeseenand,perhaps, theFed’spolicyobjective.Investorsandentrepre- undesirabledirection,asintheaboveexamples. neurswillbemorewillingtoundertakeprojects Moreoften,however,policymakershavesimply thatwouldbeadverselyaffectedbyinflation doneapoorjobinmakingtheirobjectiveknown. surprises.MarketsuccessinanticipatingFOMC Thestreetrunsbothways:Sharpchangesin actionsindicatestheFed’ssuccessindesigning marketpricescanalsooccurwhenthemarket policiestoachievethosegoalsthatsocietyaccepts errs.Ihavedeeprespectformarketjudgments, andinconveyingthosepoliciestothepublic. butdonotbelievethattheyareinvariablycorrect. ThisidealpolicydoesnotmeanthattheFed Sometimesmarketswakeuptoerrors,andprices issimplyfollowingmarketsorthattheFedisnot adjustrapidly.Verylittleisknownaboutthis exercisingproperleadership.Indeed,theremay subject,butthe1987stockmarketcrashiscer- beinstanceswherethemarketgetsitwrong.In tainlyanexampleofamarketerror.Noeconomic suchinstances,policymakersmustdowhatthey dataorpolicychangesarrivedatthetimeofthe havetodoevenifthepolicyactionsurprisesthe crashtojustifyanadjustmentthatlarge.Conse- market.Suchmarketsurprisesareanaturalpart quently,thecrashwasanerror,themarket ofthelearningprocessandareboundtooccur advancepriortothecrashwasanerror,orboth fromtimetotime. wereerrors. Forexample,therehavebeeninstanceswhen, Attimespolicymakersmayfinditnecessary foronereasonoranother,policydriftedsignifi- ordesirabletotakeunanticipatedactionsto cantlyoffcourse,eventuallyrequiringtheFedto clarifythedirectionofpolicy.Considerthe1987 takeratherdrasticactions.Onesuchinstance stockmarketcrashandtheFed’sresponse.The occurredinOctober1979,whentheFedwas crashwasatrulyfrighteningevent;iftheFed forcedtopaymuchmoreattentiontomonetary hadnotacted,Ihavelittledoubtthatuncertain- aggregatesinimplementingpolicy.Whenpolicy tieswouldhavemultipliedandmarketvolatility goesoffcourse,changesinthedirectionofpolicy wouldhaveincreasedfurther,oratleastremained arebothnecessaryanddesirable.Suchchanges atmarkedlyelevatedlevels.Uncertaintywould willinevitablysurprisethemarkets. haveaffectedthecreditmarketsingeneral,and 5 MONETARYPOLICYANDINFLATION probablyconsumptionaswell.Infact,atthetime marketandtheFed,thebettertheeconomywill therewaswidespreadcommentarytotheeffect work.Convergencereducesmarketvolatilityand thatarecessionwaslikely.Byactingpromptly, reducesexpectationalerrors,whichcanleadto theFedreassuredthemarketsthatliquidity resourcemisallocation.Firms,forexample,may wouldbeavailableasneededtopreventcascad- makeinvestmentsthatprovetobeunprofitable ingproblems.TheFed’seffortwasclearlyand becausetheirexpectationswerewrong. unambiguouslysuccessful.Therewasnoreces- TheFedhasnotreachedthepointwhereits sionandnoseriousdisturbancesspreadtocredit policyactionselicitzeroresponseinthemarkets. markets.Stockmarketvolatilitydeclined.Simi- Nevertheless,theimprovedaccuracyofmarket larly,inOctober1998,theFOMCsurprisedmarkets expectationsaboutFedpolicyhasbeenstriking byactingquicklyinthefaceofasevereliquidity inrecentyears.Letmeofferahypothesisabout crisiswithaccompanyingdisruptionstocredit theeffectsoftheincreasedsynchronization—a marketssubsequenttotheRussiandefault. hypothesisthatIhavenotyetinvestigated,but Certainly,onewaytogetthemarket’satten- hopetobeableto.Everyoneagreesthat,inrecent tionatthepresenttimeisbymakingintermeeting years,economicoutcomes—intermsofboth surprisechangesinthefundsratetarget.Before inflationandunemployment—havebeenbetter 1994,however,intermeetingchangeswerethe thaninthepast.Myhypothesisisthatmonetary ruleratherthantheexceptionandconsequently policyhasbeenmoreregularandpredictablethan werenotofspecialnoteastheyarenow.Because itusedtobeandthataconsequencehasbeen theyhavebeenrelativelyinfrequentrecently, improvedeconomicperformance.Thishypothesis intermeetingmovescurrentlytendtogarner canbetestedbyexaminingwhetherFedpolicy moreattentionthanactionstakenatregularly actionsaccountforasmallerfractionofthevari- scheduledmeetings. anceofinterestratechangesinrecentyearsthan Theresearchquestionisunderwhatcondi- inthepast.Puttheotherwayaround,myhypoth- tions,beyondclearanddramaticcasessuchas esisisthatnonpolicyeventssuchasdatareleases the1987stockmarketcrashorthe1998liquidity accountforalargerfractionoftotalinterestrate crisis,dosurprisepolicyactionsservetoclarify variancenowthantheydidinthepast. thedirectionofpolicy?Onedimensionofsucha Mymodelofsynchingthemarketsandpolicy researchagendamightbetoexaminetheeffect isincompleteinsomeimportantrespects.Two ofsurprisepolicyactionsonmarketuncertainty. issuesparticularlyconcernme.First,thepure Aretheregoodmarketmeasuresofuncertainty, versionofthemodelrequiresthattheFedand beyondsurveyinformationthatarrivesatdiscrete themarketshavethesameinformationaboutthe intervalsandhasvariousproblemsofinterpreta- economy.Ithinkthat,relativetothemarkets,the tion?Ifwecanfindusefulmeasuresofmarket Fedactuallyhassuperiorinformationinsome uncertaintyintheequityandbondmarkets,then casesandinferiorinformationinothercases. wecanbegintoexploretheconditionsunder Whatisclearisthatfullsynchronizationwith whichsurprisepolicyactionsclarifytheFed themarketsrequiresthattheFedpaycareful policyintentandhelptosynchronizemarket attentiontobothcollectingandconveyinginfor- expectationswiththedirectionofFedpolicy. mation.Transparencyandclarityarenecessary Inanyevent,thekeypointremains.Alarge ingredientsforpolicysuccess. marketresponsetoaFedpolicyactionisevidence Second,thereareconsiderabledifferencesin thatthemarketsandtheFedarenotinsynch. professionalopinionabouthowtheeconomy ThemarketortheFed,orboth,musthavebeen works.ThedebatesinsideandoutsidetheFed operatingonthebasisofdifferentinformation, aresimilar.ThemarketsandtheFedwillnever whichmayincludedifferentassessmentsofthe becompletelyinsynchbecausetherewillalways significanceofreadilyobservabledata.Themore besomethingforeconomiststoargueabout. completetheconvergenceofviewsbetweenthe Consequently,theFedandthemarketswillnot 6 GettingMarketsinSynchWithMonetaryPolicy necessarilycometothesamejudgments.Still,it informationtothemarket,andthereforemarket isimportantnottolosesightofthefactthatthere priceswillnotrespondtothembecausetheyare isanenormouscommonbaseofunderstanding fullyanticipated. betweentheFedandthemarketsandthatthis Ibelievethatapolicyagendadesignedto commonbasehasalottodowithpolicysuccess. heightenthedegreetowhichtheFedandthe marketsareinsynchisanambitiousandworthy objective.Inmyopinion,weintheFedneedto CLOSING COMMENT workontwofronts.Oneisthepolicyfrontitself, makingsurethatpolicyactionsareasappropri- I’llclosebyreemphasizingmymaintheme. atelytimedandscaledaspossible.Thesecondis WhenthemarketsandtheFedareinsynch,both onthedisclosurefront,makingsurethatknowl- willhaveacommonreactiontoincomingdata edgeinsideandoutsidetheFedconvergestothe andthemarketswillcorrectlyanticipateFed maximumpossibleextent. policyactions.Anenvironmentinwhichmarkets Progressonbothfrontswillrequirecontinuing correctlyanticipateFedactionsimpliesasitua- research.Itiscleartomethatnewinsightsinto tioninwhichFedpolicyiswidelyunderstood, theconvergenceofinformation,orlackthereof, regular,andpredictable.ThefactthatFedpolicy betweenmarketsandtheFedwillplayacentral actionssometimestakethemarketsbysurprise roleinthisresearch.Myinsighttodayiscom- showsthatwehavenotyetreachedthisideal. pletelyconsistentwith—indeedisimpliedby— Still,itisimportanttorecognizethattheFed rationalexpectationsmacromodels.WhatIhad hasmadetremendousprogressoverthelast20 notdonebeforeIcametotheFedwastorelate yearsorsoinpursuingaconsistentpolicy theseabstractmodelstothedailyebbandflow designedtoestablishpricestabilityasthenorm ofmarketreactionstonewinformation.Thecon- fortheeconomy.TheFedandthemarketsare clusionIhavebeendiscussing—that,withfull mostlyinsynch;surprisesintheincomingdata— convergenceofinformation,Fedpolicyactions whetheronprices,employment,GDP,activityin willnotaffectmarketpricesbecausethemarket economiesabroad,andsoforth—aresurprisesto hasalreadypredictedthem—initiallysurprised bothmarketsandtheFedandbothreadthesur- me.ButthemoreIthinkaboutthematter,the prisesprettymuchthesameway.Ifthemarket morecompellingtheconclusionis.Ihopeyou andFedreadingsbecomeidentical,wecanexpect findtheconclusioncompellingaswell. thatFedpolicyadjustmentswillconveynonew 7

William Poole (2001, May 3). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20010504_poole

@misc{wtfs_speech_20010504_poole,
  author = {William Poole},
  title = {Speech},
  year = {2001},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20010504_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}