Post-FOMC Announcement Drift in U.S. Bond Markets
93 Pages Posted: 15 Dec 2017 Last revised: 21 Oct 2019
Date Written: March 27, 2019
The sensitivity of long-term rates to short-term rates represents a puzzle for standard macro-finance models. Post-FOMC announcement drift in Treasury markets after Federal Funds target changes contributes to the excess sensitivity of long rates. A model in which some investors slowly adjust their extrapolative expectations of future short rates can qualitatively match the dynamics of yields. We provide evidence from interest rate forecasts and mutual fund flows that is consistent with the sticky, extrapolative version of the expectations hypothesis. Short event windows around FOMC announcements will fail to detect the full response of long rates to news about short rates.
Keywords: monetary policy, mutual funds, FOMC announcements, slow-moving capital, term structure
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