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

Sylvérie Herbert, Paul Hubert and Mathias Lé

Working papers from Banque de France

Abstract: 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 long-term 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.

Keywords: Monetary Policy Surprises; Term Structure; Identification; Policy Signals (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G12 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1017

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