Managing Expectations : Signalling effects of Federal Reserve Bank announcements over inflation expectations and expected real interest rates

Abstract: Communication is an important aspect of modern monetary policy. Since the popularization of the inflation targeting framework, communication has been used to manage expectations and maintain credibility. In recent years, forward guidance as a signaling strategy has been recognized as an important tool of monetary policy. Can communication be considered an effective monetary policy tool? Using data from the United States, in a sample from 1990 to 2019, a Bai Perron test for multiple breakpoints is conducted to identify changes in both inflation expectations, term structure of the expectation, and expected real interest rates. We find evidence that changes in expectations for both inflation and real interest rates are associated with changes in central bank’s signaling strategy.