The European Central Bank published a working paper that separates high frequency interest rate surprises around Federal Reserve communications into pure monetary policy shocks, central bank information shocks and Fed response to news shocks. Using 696 Federal Open Market Committee and other Fed communication events from January 1988 to March 2025, the authors find that central bank information effects remain robust at daily and monthly frequencies, while unexpected Fed responses to public news matter mainly at the daily frequency. Removing both effects produces stronger estimates of monetary policy transmission, including declines in output and prices and tighter financial conditions. The identification method combines interest rate and equity market movements within announcement windows, the predictability of rate surprises from public data and differences in volatility across FOMC and non-FOMC events. Central bank information shocks move interest rates and equities in the same direction, while pure policy shocks and unexpectedly forceful responses to known news move them in opposite directions. The three way decomposition is sensitive to event samples and model specifications, however, because it requires sufficient variation in the predictable component of rate surprises. Where that variation is inadequate, the paper finds that a simpler decomposition separating monetary policy and central bank information shocks remains more robust and yields similar policy estimates.
European Central Bank working paper identifies three distinct drivers of Federal Reserve policy surprises
A European Central Bank working paper separates Federal Reserve interest rate surprises into monetary policy, central bank information and Fed response to news shocks. Central bank information effects persist at daily and monthly frequencies, while Fed response to news effects are largely confined to daily data. Purging both effects strengthens estimated declines in output and prices following monetary tightening.