Market perceptions of federal reserve policy and the weekly monetary announcements

In October 1979 the Federal Reserve altered its operating procedures emphasizing control of the growth rate of the money stock. Was the Fed able to gain credibility in the market? The paper investigates this question by examining the reactions of spot and expected future exchange rates, foreign interest rates, and long-run domestic forward interest rates to the weekly Federal Reserve announcements of M-l, both before and after October 1979. The empirical evidence points out that the Fed did gain credibility, but was unable to establish full credibility. The market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the Fed may at some point in the future abandon its money stock targets.