When does Monetary Policy Matter? Policy Stance vs. Term Premium News 1

This paper investigates when monetary policy announcements matter for asset price dynamics. We identify a fundamental heterogeneity in FOMC statements based on the underlying nature of information conveyed about future policy. Using a simple but novel classification, we identify meetings that convey substantial information about uncertainty surrounding future policy. These statements -one-third of the total -drive most, if not all, of the effects of monetary policy on longterm interest rates and account for a large fraction of their variation on these days. In contrast, directional statements about the policy stance -half of all meetings -have no effect on long-term rates but do affect short-term rates and stock prices. The strong effects on long-term rates stem from term premium adjustments rather than expected future short-term rates, consistent with investors' updating their assessment of higher-order moments of future policy developments. Our classification resolves why policy announcements explain little variance in long-term rates despite driving their dynamics over time.