Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound

Gabriele Galati and Richhild Moessner

Working Papers from DNB

Abstract: We study the effects of quantitative policy rate forecasts by the Federal Reserve on real yields and inflation expectations at the zero lower bound (ZLB). We study the effects of surprises in policy rate forecasts from the Summary of Economic Projections (SEP) on real yields and breakeven inflation rates derived from government bonds for forward rates across the yield curve. We find that surprises in the SEP policy rate forecasts significantly affect real yields in the expected direction across the yield curve. By contrast, breakeven inflation rates are little affected across the yield curve. In particular, five-year breakeven inflation rates five years ahead, a common measure of monetary policy credibility, are not significantly affected by surprises in SEP policy rate forecasts. This suggests that policy rate forecasts by the Fed at the ZLB managed to affect real yields without adversely affecting monetary policy credibility.

Keywords: Forward guidance; policy rate forecasts; zero lower bound (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound (2021)
Working Paper: Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:690

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