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Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound

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  • Gabriele Galati
  • Richhild Moessner

Abstract

We study the effects of quantitative policy rate forecasts by the Federal Reserve on real yields and inflation expectations at the zero lower bound (ZLB). We study the effects of surprises in policy rate forecasts from the Summary of Economic Projections (SEP) on real yields and breakeven inflation rates derived from government bonds for forward rates across the yield curve. We find that surprises in the SEP policy rate forecasts significantly affect real yields in the expected direction across the yield curve. By contrast, breakeven inflation rates are little affected across the yield curve. In particular, five-year breakeven inflation rates five years ahead, a common measure of monetary policy credibility, are not significantly affected by surprises in SEP policy rate forecasts. This suggests that policy rate forecasts by the Fed at the ZLB managed to affect real yields without adversely affecting monetary policy credibility.

Suggested Citation

  • Gabriele Galati & Richhild Moessner, 2020. "Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound," BIS Working Papers 873, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:873
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    1. Richhild Moessner & William R. Nelson, 2008. "Central Bank Policy Rate Guidance and Financial Market Functioning," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 193-226, December.
    2. Richhild Moessner, 2014. "Effects of explicit FOMC policy-rate guidance on equities and risk measures," Applied Economics, Taylor & Francis Journals, vol. 46(18), pages 2139-2153, June.
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    5. Richhild Moessner & David-Jan Jansen & Jakob de Haan, 2017. "Communication About Future Policy Rates In Theory And Practice: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 678-711, July.
    6. Richhild Moessner, 2015. "Reactions of real yields and inflation expectations to forward guidance in the United States," Applied Economics, Taylor & Francis Journals, vol. 47(26), pages 2671-2682, June.
    7. Michelle Bongard & Gabriele Galati & Richhild Moessner & William Nelson, 2021. "Connecting the dots: Market reactions to forecasts of policy rates and forward guidance provided by the Fed," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 684-706, January.
    8. Gerlach, Stefan & Stuart, Rebecca, 2019. "Plotting interest rates: The FOMC's projections and the economy," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 198-211.
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    10. Richhild Moessner & Phurichai Rungcharoenkitkul, 2019. "The zero lower bound, forward guidance and how markets respond to news," BIS Quarterly Review, Bank for International Settlements, March.
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    17. repec:pri:cepsud:161blinder is not listed on IDEAS
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    More about this item

    Keywords

    forward guidance; policy rate forecasts; zero lower bound;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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