Have Increases in Federal Reserve Transparency Improved.pdf

ERIC T. SWANSON Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts? Yes. This paper shows that, since the late 1980s, U.S. financial markets and private sector forecasters have become (1) better able to forecast the federal funds rate at horizons out to several months, (2) less surprised by Federal Reserve announcements, (3) more certain of their interest rate forecasts ex ante, as measured by interest rate options, and (4) less diverse in the cross-sectional variety of their interest rate forecasts. We also present evidence that strongly suggests increases in Federal Reserve transparency played a role: for example, private sector forecasts of GDP and inflation have not experienced similar improvements over the same period, indicating that the improvement in interest rate forecasts has been special. JEL codes: E52, E58, E43, E44 Keywords: transparency, Federal Reserve, central bank, private sector, forecasts. The 1990s and early 2000s witnessed an unprecedented increase in central bank transparency, with New Zealand, Canada, the UK, Sweden, Finland, Israel, Australia, Spain, the European Central Bank, Norway, and several developing countries all adopting an inflation targeting framework for monetary policy,1 and many other central banks dramatically increasing the amount of informa- tion regularly released t