How Does the Fed Manage Interest Rate Expectations

I provide empirical evidence that Fed officials use their speeches to guide short-term interest rate expectations. Measures of misalignment between market and central bankers' expectations predict tone in speeches about monetary policy and that central bankers mention market expectations explicitly. These effects are strongest for voting Fed Presidents and Chairs of the Fed Board. I show that such policy arises under rational expectations when the central bank communicates in a discretionary fashion between interest rate decisions. The central bank's aversion to bond market volatility and the market’s responsiveness to communication are key determinants of the link between communication and misalignment.