Forward Guidance, Monetary Policy Uncertainty, and the Term Premium

Abstract

When the Federal Reserve provides greater clarity about the path of future interest rates, term premia in longer-term bonds fall and economic activity increases. This interest rate uncertainty channel of forward guidance sheds light on three important issues in macroeconomics. First, this channel explains how forward guidance shapes term premia, both away from and at the zero lower bound. Second, our mechanism offers a novel explanation for the puzzling fact that monetary policy announcements affect distant real forward rates. Finally, we show that event studies overstate the effects of large-scale asset purchases when they fail to control for simultaneous forward guidance.

Understanding the Aspects of Federal Reserve Forward Guidance

“…Blinder et al (2008) provide a broad survey, and Rudebusch and Williams (2008) discuss FOMC language from 1999 to 2006. More specifically, I contribute to the event-study literature focused on FOMC communication, which includes Kohn and Sack (2003), Bernanke, Reinhart, and Sack (2004), Gürkaynak, Sack, and Swanson (2005), Campbell et al (2012), Del Negro, Giannoni, and Patterson (2015), Gilchrist, López-Salido, and Zakrajsek (2015), Hanson and Stein (2015), Sinha (2015), Campbell et al (2016), Hattori, Schrimpf, and Sushko (2016), Bundick, Herriford, and Smith (2017), Swanson (2017), Lakdawala and Schaffer (2018), and Nakamura and Steinsson (2018). 4 In particular, I study Kohn and Sack's (2003) "economic-outlook" and "policy-inclination" aspects of forward guidance.…”

Policy Language and Information Effects in the Early Days of Federal Reserve Forward Guidance

“…Del Negro, Giannoni, and Patterson (2015); Gilchrist, López-Salido, and Zakrajšek (2015a); Hanson and Stein (2015); Sinha (2015); Campbell et al (2017); Hattori, Schrimpf, and Sushko (2016); Bundick, Herriford, and Smith (2017); Swanson (2017); Nakamura and Steinsson (2018); and Lakdawala and Schaffer (2019); and the literature on the macroeconomic effects of FOMC forward guidance, which includes Gertler and Karadi (2015), Bundick and Smith (2016), Miranda-Agrippino (2016), D'Amico and King (2017), Lakdawala (2019), and Jarociński and Karadi (2020). 3 In particular, I study Kohn and Sack's (2003) " economic-outlook" and " policy-inclination" aspects of forward guidance.…”

Yield Curve and Financial Uncertainty: Evidence Based on US Data

“…Proxies for conceptually different uncertainty measures have been constructed by using, among others, keywords in newspapers (Alexopoulos and Cohen ; Baker, Bloom and Davis ), forecast disagreement (Bachmann, Elstner and Sims ; Sheen and Wang ), real GDP forecast errors (Rossi and Sekhposyan , 2016), forecast errors of several macroeconomic and financial indicators (Carriero, Clark and Marcellino ), Bloomberg forecasts (Scotti ), interest rate data (Mumtaz and Zanetti ; Creal and Wu ; Istrefi and Mouabbi ; Bundick, Herriford and Smith ), and Google Trends data (Castelnuovo and Tran ; Shields and Tran ).…”