Informed monetary policymaking requires accurate measurement of causal effects, which for the Federal Reserve Bank of Kansas City is an ongoing evolution, said Federal Reserve Economists Karlye Dilts, Amaze Lusompa and Philip An, in a report from the Kansas City Federal Reserve.
However, monetary policy and its outcomes are shaped by economic developments, so simply observing the evolution of conditions following a policy decision is not enough to determine that policy shaped them, the economists said.
HIGH-FREQUENCY IDENTIFICATION
A common approach, high-frequency identification, uses changes in asset prices to capture responses to an unexpected change in policy, the Federal Reserve report said. This method requires several assumptions: The measurement period should be narrow enough to ensure policymakers have fixed their decision, the asset price changes should incorporate only monetary policy information and no other news, the information and reaction should be fully covered by the time interval, and the public must have full information (and rational expectations) about economic conditions before the announcement.
As a result, the mix of assets used to measure policy has shifted to reflect longer-duration assets and a longer policy horizon, the economists said. Research has been less apt to address a related issue: while the conduct of monetary policy was well suited to measuring variations within a 30-minute interval before the Global Financial Crisis, it seems less the case today.
EVENTS CHALLENGE POLICYMAKERS
The events of the last two decades have challenged policymakers to develop new tools in pursuit of their mandates, the Federal Reserve Bank study said. The expanded role of forward guidance, the growing salience of verbal communication, and the integration of longer-maturity assets in the central bank tool kit have lengthened the interval over which news is transmitted and processed.
The novelty of those strategies only elevates the importance of adapting methods as needed to measure their effects more precisely, the economists said. To accommodate these changes to communication, a longer window likely is necessary.
The economists said using daily data, shows, at the very least, that the cost of using daily data across the sample — the chance that confounding factors cloud the analysis — is outweighed by the benefit, which is the chance to capture longer timed reactions that likely accompany contemporary communication.
Although short event windows offer a better chance at separating reactions to monetary policy from other news that might be revealed during the day, they can also cut certain, arguably important, events short, they said. It seemed evident to them that short-term measurements assumed all reaction to monetary policy changes occurred in a short period after the change.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $230.70 per cwt to $241.00, compared with last week’s range of $238.09 to $244.00 per cwt. FOB dressed steers and heifers went for $360.27 per cwt to $375.71, compared with $373.45 to $379.73.
The USDA choice cutout Thursday was down $0.94 per cwt at $365.22 while select was down $0.91 at $344.33. The choice/select spread narrowed to $20.89 from $20.92 with 110 loads of fabricated product and 27 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef as $421.53 per cwt, and 50% beef was $147.21.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.00 to $1.20 a bushel over the Dec corn contract, which settled at $4.18 1/4, down $0.03 3/4.
No live cattle delivery notices were posted.
The CME Feeder Cattle Index for the seven days ended Wednesday was $367.35 per cwt, up $1.84. This compares with Thursday’s Oct contract settlement of $374.02, up $4.52.