The Information Value of the FOMC Policy Directive under the New Operating Procedures

Abstract

THE FEDERAL RESERVE S Federal Open Market Committee (FOMC) meets every one to two months to determine its monetary policy objectives over the near-term. At the conclusion of each meeting, the FOMC issues a policy directive to the system's account manager (at the New York Federal Reserve Bank) specifying short-run money growth targets and a federal funds interest rate tolerance range. The policy directive is not disclosed to the public until after the next meeting when a new directive becomes effective. In an earlier paper (O'Brien 1981), evidence was presented suggesting that immediate disclosure of the FOMC policy directives over the period January 1976-June 1979 would have improved the accuracy of market expectations of near-term interest rate levels by no more than minor amounts. In this paper we examine the information value of the FOMC policy directives in predicting near-term levels of interest rates urder the Federal Reserve's revised operating procedures, adopted in late October 1979 but modified in late 1982. In the next section, the interest rate information value of the FOMC policy directive is discussed in terms of a simple money demand and supply model.