Are households indifferent to monetary policy announcements?

Summary

Focus

An important channel of monetary policy transmission operates through agents' expectations about inflation. Central banks' communication strategies aim to steer agents' expectations consistently with the monetary policy decisions taken. It is generally acknowledged that financial markets participants' expectations react promptly to monetary policy announcements. But how well do such strategies perform in shaping expectations of households, especially those less sensitive to economic news?

Contribution

We study the impact of the Federal Reserve's monetary policy announcements on households' expectations by comparing responses to the Survey of Consumer Expectations before and after Federal Open Market Committee (FOMC) meetings, over the period 2013-19. Contrary to studies based on experimental evidence where households are provided with information on the outcome of the FOMC meeting, our approach assesses households' reaction to the Fed announcements or to the information filtered by the media.

Findings

We find that monetary policy announcements affect expectations of interest rates on savings accounts, particularly for respondents with high financial literacy. But the impact of monetary policy announcements on inflation expectations is muted, even in response to some of the most relevant FOMC meetings that took place during that period. Our results stand in contrast to experimental studies documenting stronger effects of monetary policy announcements on households' expectations. This suggests that the flow of information on monetary policy that naturally reaches the general population may provide too weak signals.

Abstract

We study the impact of the Fed's monetary policy announcements on households' expectations by comparing responses to the Survey of Consumer Expectations before and after Federal Open Market Committee (FOMC) meetings, over the period 2013-2019. We find that Fed decisions affect expectations of interest rates on savings accounts, particularly for respondents with high financial and numerical literacy. The impact of monetary policy announcements on inflation expectations is muted, even in response to some of the most relevant meetings of the FOMC that took place during that period. Expectations of personal financial conditions are barely affected. Our results stand in contrast to experimental studies that find strong effects of monetary policy and other macroeconomic news on expectations of households receiving a specific treatment, suggesting that the news naturally reaching the general population may provide weaker signals.

JEL classification: E30, E40, E50, E70

Keywords: households, monetary policy, central bank communication, inflation expectations, survey data