Abstract: I show that political alignment between Federal Open Market Committee (FOMC) members and the incumbent U.S. President systematically influences monetary policy. I construct two novel, individual-level measures of political alignment for each member of the FOMC, based on their political campaign contributions and political appointments to public roles. Using a stacked Difference-in-Differences design around presidential party transitions from 1990, I find that a individual-level positive shift in political alignment with the sitting U.S. President leads FOMC members toward more expansionary policy preferences and more optimistic macroeconomic forecasts (over-forecasting GDP and under-forecasting inflation). The results also hold when examining historical FOMC votes starting from 1936. At the committee level, a one-point increase in political alignment of the FOMC lowers the federal funds rate by approximately 25 basis points relative to the Federal Reserve staff’sbenchmark recommendation. These politically-driven rate decisions generate a partisan business cycle: periods of political alignment between the Fed and the executive lead to more frequent interest rate cuts, stimulating short-term gains in real gdp, employment, and stock market, but contributing to higher inflation in the long run. Conversely, during periods of political misalignment the FOMC raises interest rates above the apolitical benchmark, resulting in short-run output contractions, but controlling long-run inflation.
Discussant: Thomas Drechsel, University of Maryland
Abstract: We study the Federal Reserve's monetary policy communication in the post-2020 period, focusing on its impact on market expectations and term premia. We explore a channel whereby changing public perceptions of policy mistakes due to communication failures can raise risk premia. We document that the FOMC's post-framework communication sowed uncertainty about the Fed's reaction function, especially its response to inflation. Concerns about policy mistakes raised term premia, undermining the easy financial conditions the Fed initially sought. While the pre-tightening period saw an increased sensitivity of term premia to inflationary surprises, the hawkish pivot post-March 2022 prevented, in part, premium increases on disappointing macro news. By highlighting the importance of effective communication in shaping market beliefs and financial conditions, we derive some general lessons from the FOMC's communication during this period.
Discussant: Anthony Diercks, Federal Reserve Board of Governors
Abstract: Abstract: A significant fraction of measured surprise central bank interest rate hikesis associated with simultaneous stock market run-ups and upward revisions in economicgrowth forecasts. This evidence is often interpreted as contradicting the standard New Keynesian transmission mechanism and as indicating that the Fed possesses superior informationabout economic fundamentals. We present a New Keynesian model in which investors areuncertain about the Fed’s long-run monetary policy objectives and learn from observed Fedactions. Our model does not assume that the Fed has superior information, but it nonetheless generates a “Fed information effect,” that is, a positive co-movement between interestrate surprises, revisions in expected growth, and stock returns as an equilibrium outcome.We show that the key predictions of our model are consistent with empirical evidence onasset market responses to measured Fed information shocks.
Discussant: Benjamin Golez, University of Notre Dame
