investigates whether the U.S. Federal Reserve’s balance sheet can be used to
predict macroeconomic outcomes. The
Federal Reserve writes its own accounting standards, and I recast portions of
the Federal Reserve’s weekly balance sheet as if it more closely followed
Generally Accepted Accounting Principles.
Specifically, I estimate the fair value of the Federal Reserve’s U.S.
Treasury notes and bonds and calculate the associated unrealized gains and
losses. I demonstrate that unrealized
gains (losses) on the Federal Reserve’s U.S. Treasury notes and bonds are
associated with lower (higher) one-quarter ahead inflation and real gross
domestic product growth. Additionally, I
show that modifying proxies for macroeconomic news to incorporate the
predictive value of unrealized gains and losses on the Federal Reserve’s U.S.
Treasury notes and bonds helps explain equity returns around the release of