Visiting Speaker: Luigi Bocola, Stanford University
Host: Cesar Sosa-Padilla
Presentation Title: Bond Market Views of the Fed
Abstract:
This paper uses high frequency data to detect shifts in financial markets’ perceptionof the Federal Reserve stance on inflation. We construct daily revisions to expectationsof future nominal interest rates and inflation that are priced into nominal and inflation-protected bonds, and find that the relation between these two variables—positive andstable for over twenty years—has weakened substantially over the 2020-2022 period.In the context of canonical monetary reaction functions considered in the literature,these results are indicative of a monetary authority that places less weight on inflationstabilization. We augment a standard New Keynesian model with regime shifts in themonetary policy rule, calibrate it to match our findings, and use it as a laboratory tounderstand the drivers of U.S. inflation post 2020. We find that the shift in the monetarypolicy stance accounts for half of the observed increase in inflation.