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Press Release

Policy rule parameters implied by the FOMC’s median SEP paths appear to have changed over time, says Cleveland Fed economist

His estimates suggest the federal funds rate projections have become less responsive to the unemployment gap over the last year

Each quarter, the Federal Open Market Committee (FOMC) releases a compilation of FOMC participants' forecasts in the Summary of Economic Projections (SEP). Looking at the relationship between projections for the appropriate federal funds rate and economic outcomes can provide a sense of the monetary policy "reaction function"—a general description of how policy is likely to respond under a variety of conditions, according to Edward S. Knotek II, a senior vice president and research economist at the Federal Reserve Bank of Cleveland. "Because forecasts change as economic shocks occur," says Knotek, "the insights into the reaction function implied by the SEP are arguably one of its strengths, even if these insights are imprecise."

Knotek estimates the reaction function in the SEP under the assumption that it takes the form of a particular simple monetary policy rule which connects the federal funds rate to a small set of variables. To estimate the parameters of the implied simple policy rule, Knotek relates the median path of the federal funds rate in the SEP to the median projections for inflation and the unemployment rate, as a way to capture the center of the Committee.

Says Knotek, "Based on all of the SEPs available between December 2015 and March 2019, the parameters of the estimated policy rule bear some similarities to those in the original Taylor (1993) rule, after controlling for interest rate smoothing. When looking at each of the quarterly SEPs one at a time, however, the implied policy rule parameters appear to have changed over time. In particular, estimates suggest that the federal funds rate path has become less responsive to the unemployment gap over the last year; projections of the unemployment rate running below its longer-run level now put less upward pressure on the federal funds rate than was true earlier in the estimation sample."

Knotek says that a number of alternative explanations could account for this finding. "While this finding may reflect changes in policymakers' preferences, it could alternatively or additionally reflect uncertainty over other aspects of the assumed simple policy rule, risk management considerations, or the limitations of estimating simple monetary policy rules from the median SEP paths," says the researcher.

Read Changing Policy Rule Parameters Implied by the Median SEP Paths

And check out other recent economic research from the Cleveland Fed:

Residual Seasonality in GDP Growth Remains after Latest BEA Improvements

Update on Fed Funds Rates Based on 7 Simple Monetary Policy Rules

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479