The Term Structure of Monetary Policy Uncertainty

Brent Bundick, Trenton Herriford and Andrew Smith

No RWP 22-02, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. High-frequency movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but, instead, are two dimensional. We characterize these two dimensions as the Level and Slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors help to explain changes in Treasury yields and forward real interest rates following FOMC announcements, even after accounting for changes in the expected path of policy rates. Finally, compared to high-frequency instruments derived from interest rate futures, our policy uncertainty factors provide stronger first-stage instruments and imply FOMC forward guidance has been more effective in stimulating economic activity in a standard proxy SVAR.

Keywords: Monetary Policy Uncertainty; Forward Guidance; Proxy VAR (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 44
Date: 2022-02-25, Revised 2023-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: The Term Structure of Monetary Policy Uncertainty (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:93837

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DOI: 10.18651/RWP2022-02

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