Monetary policy and the yield curve

Edward Gamber () and Julie Smith
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Edward Gamber: Congressional Budget Office

Economics Bulletin, 2020, vol. 40, issue 1, 407-424

Abstract: The Federal Reserve's movement toward greater transparency in the mid-1990s offers a natural experiment that allows us to investigate the response of the yield curve level, slope and curvature to federal funds rate innovations. Prior to the mid-1990s the yield curve typically steepened in response to such innovations, indicating that financial market participants interpreted changes in the federal funds rate as a signal of the Fed's concern about inflation. Consistent with our hypothesis, since the mid-1990s, as the Fed moved toward greater transparency and as inflation expectations became better anchored, innovations in the federal funds rate have little or no effect on the yield curve slope.

Keywords: yield curve; Federal Reserve transparency; principal components; slope of yield curve; fed funds rate (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2020-02-05
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