Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?

Abstract

A number of recent papers have hypothesized that the Federal Reserve possesses information about the course of inflation and output that is unknown to the private sector, and that policy actions by the Federal Reserve convey some of this superior information. We conduct two tests of this hypothesis: 1) could monetary policy surprises be used to improve the private sector's ex ante forecasts of subsequent macroeconomic statistical releases, and 2) does the private sector revise its forecasts of macroeconomic statistical releases in response to these monetary policy surprises? We find little evidence that Federal Reserve policy surprises convey superior information about the state of the economy: they could not systematically be used to improve forecasts of statistical releases and forecasts are not systematically revised in response to policy surprises. One possible exception to this pattern is Industrial Production, a statistic that the Federal Reserve produces.