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The Response of Term Rates to Fed Announcements

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Author Info
Demiralp, Selva
Jorda, Oscar

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Abstract

In February 4, 1994 the Federal Reserve began the practice of announcing changes in the targeted level for the federal funds rate immediately after such decisions were made. This paper investigates to what extent the policy of "the announcement" affected a key ingredient in the monetary transmission mechanism: the term structure of nominally risk-free, Treasury securities. We find that term rates react much more in unison during announcement days than at any other time. Moreover, the practice of circumscribing almost all changes in the federal funds rate target to Federal Open Market Committee (FOMC) meeting dates regiments the formation of market expectations in the overnight rate and the price discovery process of term rates, thus facilitating the Fed's goal of controlling long-term rates.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 36 (2004)
Issue (Month): 3 (June)
Pages: 387-405
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Handle: RePEc:mcb:jmoncb:v:36:y:2004:i:3:p:387-405

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Michael Lamla & Sarah M. Rupprecht, 2006. "The Impact of ECB Communication on Financial Market Expectations," KOF Working papers 06-135, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  2. Jorge Sicilia & Gabriel Perez-Quiros, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Paper Series 192, European Central Bank. [Downloadable!]
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  3. Michael Ehrmann & Marcel Fratzscher, 2005. "Communication and decision-making by central bank committees - different strategies, same effectiveness?," Working Paper Series 488, European Central Bank. [Downloadable!]
  4. Bjørn-Roger Wilhelmsen & Andrea Zaghini, 2005. "Monetary policy predictability in the euro area: an international comparison," Working Paper Series 504, European Central Bank. [Downloadable!]
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  5. Bandholz, Harm & Clostermann, Joerg & Seitz, Franz, 2007. "Explaining the US Bond Yield Conundrum," MPRA Paper 2386, University Library of Munich, Germany. [Downloadable!]
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  6. Troy Davig & Jeffrey R. Gerlach, 2006. "Monetary Policy, the Bond Market, and Changes in FOMC Communication Policy," Working Papers 31, Department of Economics, College of William and Mary. [Downloadable!]
  7. Ryan R. Brady, 2006. "Credit Cards and Monetary Policy: Are Households still Liquidity-Constrained?," Departmental Working Papers 12, United States Naval Academy Department of Economics. [Downloadable!]
  8. Andreas Schabert, . "Identifying Monetary Policy Shocks with Changes in Open Market Operations," Working Papers 2003_10, Department of Economics, University of Glasgow, revised Jun 2003. [Downloadable!]
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  9. Selva Demiralp, 2008. "Monetary Policy Surprises and the Expectations Hypothesis at the Short End of the Yield Curve," TÜSİAD-Koç University Economic Research Forum Working Papers 0802, TUSIAD-Koc University Economic Research Forum. [Downloadable!]
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  10. Silvio Colarossi & Andrea Zaghini, 2007. "Gradualism, Transparency and Improved Operational Framework: A Look at the Overnight Volatility Transmission," CFS Working Paper Series 2007/16, Center for Financial Studies. [Downloadable!]
  11. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Òscar Jordà, 2005. "Can monetary policy influence long-term interest rates?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue May 20. [Downloadable!]
  13. Paolo Angelini, 2002. "Liquidity and Announcement Effects in the Euro Area," Temi di discussione (Economic working papers) 451, Bank of Italy, Economic Research Department. [Downloadable!]
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  14. Ben Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  15. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission," Temi di discussione (Economic working papers) 710, Bank of Italy, Economic Research Department. [Downloadable!]
  16. Michael Ehrmann & Marcel Fratzscher, 2005. "The timing of central bank communication," Working Paper Series 565, European Central Bank. [Downloadable!]
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