Effects of explicit FOMC policy rate guidance on market interest rates
AbstractWe 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.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 384.
Date of creation: Jul 2013
Date of revision:
Monetary policy; central bank communication; policy rate guidance;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-05 (All new papers)
- NEP-CBA-2013-08-05 (Central Banking)
- NEP-MAC-2013-08-05 (Macroeconomics)
- NEP-MON-2013-08-05 (Monetary Economics)
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- Richhild Moessner, 2014. "International spillovers from US forward guidance to equity markets," DNB Working Papers 427, Netherlands Central Bank, Research Department.
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