The US Monetary Policy Surprise: Taking Stock of the US Treasury Yield Curve

Speaker: Audrey Soedjito

Affiliation: Brandeis University

Location: Level 6 Boardroom, Colin Clark Building (#39), St Lucia Campus

Abstract: I decompose the daily change of the US Treasury yield curve following 257 FOMC announcements from the 1st of February 1995 to the 31st of January 2024 into its surprise and anticipated change in the short- (slope), medium- (curvature) and long-term (level) factors that make up the US Treasury yield curve. I further identified the daily surprise change as US monetary policy surprise and established three key findings: First, the level, slope, and curvature surprise are uniquely identified as the surprise changes in the Large-Scale Asset Purchase (LSAP), forward guidance, and federal funds rate. Second, I documented the growing role of forward guidance in monetary policy transmission in the US as evidenced by the increasing influence of the surprise change to the curvature factor on the daily change of the US Treasury yield curve after the 2008-2015 Zero Lower Bound (ZLB) period. Third, my estimation shows that when the Fed is not constrained at the ZLB and maintains interest rate amid tightening episodes after the introduction of forward guidance in October 2007, they can achieve nearly the same results as cutting interest rate since the whole yield curve shifts down by at least 0.025 percentage points on average.