Monetary policy surprises and interest rates: Evidence from the Fed funds futures market

Kuttner, Kenneth N.

doi:10.1016/s0304-3932(01)00055-1

Cited by 1,618 publications

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“…Although theory provides no certain identification of the efficacy of central bank communication, the high-frequency estimation strategy pioneered by Kuttner (2001) can be used to shed empirical light upon it. FOMC policy actions occur at discrete moments, usually during the U.S. business day.…”

Section: Measurement With High-frequency Datamentioning

confidence: 99%

“…Financial market participants trade on these actions, and the resulting changes in asset prices can be used to identify their unexpected components. Kuttner (2001) measured the unexpected change in the current policy rate with changes in the price of the futures contract that settled based on the average fed funds rate in the month containing the FOMC meeting. Building on this work, Kohn and Sack (2004) measured the variance of asset price changes on days of FOMC meetings with and without accompanying post-meeting statements.…”

Section: Measurement With High-frequency Datamentioning

confidence: 99%

“…More importantly, none of the Wald tests indicate that the included variables have explanatory power. 11 Equation (3) identifies Delphic forward guidance as a possible complication for the identification scheme of Kuttner (2001), so this absence of evidence for short-run Delphic forward guidance influencing the current policy rate indicates that this is not a practical difficulty.…”

Section: Variancementioning

confidence: 99%

See 2 more Smart Citations

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Campbell

Fisher

Justiniano

et al. 2017

NBER Macroeconomics Annual

145

153

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper studies the effects of FOMC forward guidance. We begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed entirely to Delphic forward guidance. However a large fraction of futures rates' variability on announcement days remains unexplained, leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end we use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009q1-2014q4, in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function from before the crisis as closely as possible while respecting the effective lower bound. We find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis than FOMC forward guidance did in practice. However starting toward the end of 2011, after the Fed's introduction of "calendar-based" communications, the FOMC's Odyssean guidance appears to have boosted real activity and moved inflation closer to target. We show that our results do not reflect Del Negro, Giannoni, and Patterson (2015)'s forward guidance puzzle. JEL Codes: E0. Terms of use: Documents in

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Section: Measurement With High-frequency Datamentioning

confidence: 99%

Section: Measurement With High-frequency Datamentioning

confidence: 99%

Section: Variancementioning

confidence: 99%

See 1 more Smart Citation

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Campbell

Fisher

Justiniano

et al. 2017

NBER Macroeconomics Annual

145

153

View full text Add to dashboard Cite

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“…Studies by Kuttner (2001), Cochrane and Piazzesi (2002), Gurkaynak, Sack, and Swanson (2005a), Ellingsen and Söderström (2003), Ellingsen, Söderström, and Masseng (2004) and Beechey (2007) provide evidence that unanticipated changes in the federal funds rate have significant effects on U.S. interest rates at maturities as long as 10 or 30 years. Kuttner's estimates, for example, indicate that an unanticipated rise of one-percentage point in the federal funds target rate will increase the interest rate on a 10-year government security by 32 basis points and the rate on a 30-year security by almost 20 basis points.…”

Section: Introductionmentioning

confidence: 99%

Monetary policy and U.S. long-term interest rates: How close are the linkages?

Berument

Froyen

2009

Journal of Economics and Business

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The effect of monetary policy on long-term interest rates has been a question of interest in recent years. A number of papers, relying on single-equation estimation techniques, have presented evidence that long-term interest rates exhibit sizable and significant responses to unanticipated changes in the Federal Reserve's target federal funds rate. This paper examines these findings in light of conflicting findings from VAR studies, which indicate negligible effects of innovations in the federal funds rate on long-term rates. To address the issue we use a single-equation approach where unanticipated changes in the federal funds rate are measured as residuals from policy reaction functions. We also estimate VAR specifications, which incorporate information about the timing of changes in the Federal Reserve's target federal funds rate. Our single-equation estimates provide evidence of strong responses of long rates to unanticipated changes in the federal funds rate both for the Greenspan period and for a longer period back to the mid-1960s. It seems likely that estimated VARs for the post-1987 years are less successful in isolating monetary policy surprises than was the case for earlier years.

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“…Event study papers equate the change in an observable short maturity interest rate- Cochrane and Piazzesi (2002) use the 30-day Eurodollar rate, Bernanke and Kuttner (2003), Kuttner (2001), and Poole and Rasche (2001) use the Federal Funds Futures market rate-with the monetary policy surprise. If this identification assumption is correct, then regressing the security yield or return on the change in the short maturity yield on event days gives a consistent estimate of the response.…”

Section: Introductionmentioning

confidence: 99%

Monetary Policy Shocks and Security Market Responses

Craine

Martin

2003

SSRN Journal

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Abstract:This paper contributes to a recent literature that tries to filter exogenous monetary policy surprises from high frequency (daily) data. The literature uses the fact that monetary policy surprises are realized only on days that the Federal Reserve changes the Federal Funds Target, or on days that the Federal Open Market Committee (FOMC) meets and does not change the target-so-called "event days". We add to the literature in three ways: (1) we specify a more general model in which security prices respond to two sources of systematic risk (a two factor model)-a common information shock and the monetary policy shock-plus nonsystematic risk-an idiosyncratic shock. (2) We use all of the daily data while other studies use only a small sub-sample of less than 10% of the data. And (3) we use new estimation strategy that gives consistent and more efficient parameter estimates than previous studies.Our empirical results show that efficiently estimating a more general model leads to important differences. Common shocks have an important and statistically significant impact on bond yields at all maturities. Leaving out the common information shocks leads to bad estimates of the impact of monetary policy shocks. Cochrane and Piazzesi's event study found that the yield on a 10 year bond increases in response to a positive Target surprise-which they properly label a puzzle. The factor model solves the puzzle. We get the classic textbook response-a surprise increase in the target rate leads to a decline in the yield on the 10 year bond. Finally we look at equity returns as well as bond yields which introduces a different puzzle. In any model we look at a positive Target surprise causes a large and significant decline in equity returns. A recent event study paper of equity market responses by Bernanke and Kuttner (2003)

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Monetary policy surprises and interest rates: Evidence from the Fed funds futures market

Cited by 1,618 publications

References 8 publications

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Monetary policy and U.S. long-term interest rates: How close are the linkages?

Monetary Policy Shocks and Security Market Responses

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