The Determinants of Disagreement between the FOMC and the Fed's Staff: New Insights Based on a Counterfactual Interest Rate

Abstract

We examine the degree and sources of disagreement between the members of the Federal Open Market Committee (FOMC) and the Federal Reserve's (Fed's) staff about the appropriate policy rate for the period 1994-2011. For that purpose, we compute a recommended interest rate for the Fed's staff based on its own Greenbook forecasts and a time-varying monetary policy rule a la Taylor (1993), and compare it with the actual target rate. First, we find that there has been persistent internal disagreement between FOMC members and the Fed's staff about the appropriate policy rate. Second, we reveal that members with an occupational background in finance favor a relatively more hawkish monetary policy. In addition, a preference towards a tighter monetary policy is found under a Democratic President and during Alan Greenspan's tenure as the Fed's Chairman. Finally, higher oil prices, a low degree of uncertainty, and episodes of financial stability are also associated with higher interest rates as compared to the Fed staff's recommendation.