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Fed words speak louder than actions?
Paper finds that FOMC statements affect markets, may be more effective policy tool than actions.
May 19, 2005: 12:03 PM EDT

WASHINGTON (Reuters) - For the Federal Reserve, choice of words may be a more effective monetary policy tool than actions, a paper written by staff from the Federal Reserve and published Thursday concludes.

The authors -- Refet Gurkaynak and Eric Swanson, of the Fed's division of monetary affairs, and Brian Sack of Macroeconomic Advisors -- looked at the seismic impact on financial markets of the Fed's decision to drop the phrase "policy accommodation can be sustained for a considerable period" from its Jan. 28, 2004 statement.

Yields on two-year and five-year Treasury securities jumped by the largest margins on record in response to an announcement by the Fed's policy-making Federal Open Market Committee -- even though the FOMC left the federal funds rate unchanged at the time.

FOMC statements and public statements by FOMC members affect markets by influencing expectations of what the FOMC will do in the future, the authors said.

"The FOMC may be able to effectively communicate to the markets its intention to keep the federal funds rate low for an extended period, thereby lowering longer-term interest rates and stimulating economic growth," the authors concluded.

The paper, "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," appeared in the inaugural issue of the International Journal of Central Banking, which was edited by Fed governor and nominee to head the White House Council of Economic Advisors Ben Bernanke.

The authors said the paper represents their own views and not the Fed's.

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