Impact of US policies on US Treasury yield curve
Michael Bauer of FRBSF writes this nice short paper on the topic.
Policies impact yield curve but the impact varies across maturities. So some policies impact shorter end more than longer end.Some impact the mid tenors more. Bauer looks at the policies and their impact in recent times :
- unexpected changes in monthly nonfarm payroll employment numbers cause large movements at short and medium maturities, but do not affect long-term interest rates.
- Inflation news affects the long end of the term structure.
- Monetary policy actions vary in their effects on interest rates, but cause volatility at all maturities, including distant forward rates.
The one on impact of mon pol is particularly interesting:
Figure 3 shows the effects on forward rates of three Fed moves in 2007 to lower the federal funds target: a half percentage point cut on September 18, a quarter percentage point cut on October 31, and another quarter percentage point cut on December 11. These three easing actions had very different effects on the term structure. In September, the size of the cut surprised market participants. Short-term rates fell, but longer forward rates actually increased, which may have reflected an upward revision in expectations about economic growth. In October, forward rates at short and medium horizons increased on the day of the meeting, probably because markets had expected a larger federal funds rate move or a change in the language of the Fed’s policy statement. Thus, monetary policy was viewed as tighter than previously anticipated. Markets had anticipated the Fed’s December cut, so the short end of the term structure did not move much. But medium and longer-term forward rates fell significantly. Changing statement language apparently led market participants to expect much easier monetary policy over the medium and long horizons.
These different impacts have made any projections etc so difficult. So even if your forecast on Fed move has been right, you really do not know how the yields will move…