Effects of Explicit FOMC Policy Rate Guidance on Market Interest Rates
31 Pages Posted: 24 Jul 2013
Date Written: July 23, 2013
Abstract
We quantify the impact of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on market interest rates. We study the impact on short- to medium-term interest rates implied by Eurodollar interest rate futures contracts, and on near- to long-term interest rates implied by US Treasury securities. We find that explicit policy rate guidance announcements significantly reduced interest rates implied by Eurodollar futures at horizons of 1 to 5 years ahead, with the largest effect at the intermediate horizon of 3 years. We also find that they significantly reduced forward interest rates implied by US Treasuries at horizons of 1 to 7 years ahead, with the largest effect at the intermediate horizons of 4 and 5 years. Moreover, we find that explicit FOMC policy rate guidance led to a significant reduction in the term spread, ie to a fiattening of the yield curve, both for the Eurodollar futures curve and the US Treasury yield curve.
Keywords: monetary policy, central bank communication, policy rate guidance
JEL Classification: E58
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Preferred-Habitat Model of the Term Structure of Interest Rates
By Dimitri Vayanos and Jean-luc Vila
-
A Preferred-Habitat Model of the Term Structure of Interest Rates
By Dimitri Vayanos and Jean-luc Vila
-
A Preferred-Habitat Model of the Term Structure of Interest Rates
By Dimitri Vayanos and Jean-luc Vila
-
What Does Monetary Policy Do to Long-Term Interest Rates at the Zero Lower Bound?
-
Large-Scale Asset Purchases by the Federal Reserve: Did They Work?
By Joseph Gagnon, Matthew Raskin, ...