Monetary policy surprises and interest rates: Evidence from the Fed funds futures market

This paper estimates the impact of monetary policy actions on bill, note, and bond yields, using data from the futures market for Federal funds to separate changes in the target funds rate into anticipated and unanticipated components. Interest rates’ response to anticipated target rate changes is small, while their response to unanticipated changes is large and highly significant. These responses are generally consistent with the expectations hypothesis of the term structure. Surprise target rate changes have little effect on expectations of future actions, however, which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve.