Money Supply Announcements and the Market's Perception of Federal Reserve Policy

Strongin, Steven; Tarhan, Vefa
May 1990
Journal of Money, Credit & Banking (Ohio State University Press);May90, Vol. 22 Issue 2, p135
Academic Journal
The article examines the rise in interest rates in response to positive innovations in the money supply during the early and mid-1980s in the United States. One of the major hypothesis developed regarding the issue is the liquidity premium hypothesis, which holds that the market expects that the Federal Reserve will respond to a positive innovation in the money supply by raising reserve pressures and thereby raising interest rates. The expected inflation hypothesis is viewed as the alternative to the liquid premium hypothesis. The expected inflation hypothesis holds that the market expects the Federal Reserve will accommodate the excess money growth and this will result in the increase of the market's expectations of future inflation, which will result in raised interest rates.


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