Policy Makers' Uncertainty" with Anna Ciesla k, Stephen Hansen, and Song Xiao
Abstrac t:
Uncertainty is a ubiquitous concern e mphasized by policymakers. We study how uncertainty affects decision-making by the Federal Open Market Committee (FOMC). We distinguish between the no tion of the Fed-driven uncertainty that is induced by the policy choice and the classic notion of uncertainty that emanates from within the economy an d which the Fed takes as given. A simple theoretical framework illustrates how the Fed-driven uncertainty introduces a wedge between the standard Tayl or-type rule and the optimal decision. Using internal Fed deliberations, we provide the first quantification of the types of uncertainty that the Fed perceives and their effects on the policy stance. The FOMC members’ uncerta inty about inflation strongly predicts a more hawkish policy stance that is not explained either by the internal Fed’s forecasts or by the measures of public uncertainty. In contrast, policymakers' uncertainty about growth ha s no impact on policy decisions beyond these standard controls. Consistent with a model of inflation scares, policymakers’ inflation uncertainty refle cts their constant worries about losing the nominal anchor. We argue that t he desire to maintain inflation credibility is an important driver of the F OMC's decisions and provide evidence from the FOMC transcripts consistent w ith this channel.
DTSTAMP:20260913T052233Z DTSTART:20221024T143000Z DTEND:20221024T160000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR