In these statistical models, it occurs when there is an unexpected change in the federal funds rate. In short, from the point of view of the model, the FOMC wakes up one morning and surprises markets with a 25basis point hike.2 While this is a fun exercise to see what happens, it doesn’t really capture how monetary policy works in practice.
Only rarely do policymakers try to surprise markets, and in fact, we usually specify our policy intentions well ahead of time through the use of forward guidance. As I said earlier, forward guidance is one of the purposes of this speech.