Describing Fed Behavior

Describing the reasons for the policy actions of the Federal Reserve has long been a popular topic for economists, economic journalists, investors, and others. In particular, there is keen interest in what economists call the Fed’s implied “reaction function,” which models how the Fed sets monetary policy in response to conditions in the economy. This interest is not surprising given that the reaction function can provide insight into possible future changes in the stance of Fed policy. Also, within the context of a model of the economy, a reaction function provides a basis for evaluating monetary policy (as in Rudebusch and Svensson 1998), as well as for understanding the effects of other policies (for example, scal policy) or economic shocks (for example, the 1970s oil embargo) that may FRBSF Economic Letter