FOMC Statements Drive Treasury Rates, Revealing Future Interest Rate Actions
A new method was developed to measure how central banks communicate about future interest rate decisions. By analyzing statements from the Federal Open Market Committee (FOMC) since 1999, researchers found that short-term Treasury yields react to policy rate changes, while longer-term yields respond more to policy communication. Changes in statement content predict future rate decisions by over a year, and communication has a bigger impact on Treasury rates than actual rate decisions. FOMC statements provide valuable information on predicted interest rates and residual components, leading the residual by a few quarters.