Focus
We assess the economic mechanisms that were driving the dominant role of US monetary policy announcements in the global secular downward trend in long-term interest rates.
Contribution
We provide a new explanation for the role of US monetary policy announcements in the secular dynamics of long-term interest rates, highlighting revisions to the perceived monetary policy reaction function as a key factor.
Findings
We document three main results. First, the global secular decline in long-term interest rates since the 1990s has been largely driven by cumulative yield changes during US monetary policy announcement windows (Federal Open Market Committee, or FOMC, windows). Second, we show that the effect operates through the expected path of future short-term interest rates rather than through term premia. Third, the global secular decline in interest rates has been concentrated in FOMC windows preceded by macroeconomic news, consistent with a “Fed response to news” channel.
Abstract
The global secular decline in long-term interest rates since the 1990s has been largely driven by cumulative yield changes during U.S. monetary policy announcement windows (FOMC windows). We document this FOMC-window effect for a group of ten major advanced economies. Based on a term structure model, we show that the effect operates through the expected path of future short-term interest rates rather than term premia. We further find that the global secular decline in interest rates has been concentrated in FOMC windows preceded by macroeconomic news. We interpret this pattern as a “Fed response to news” channel and provide empirical evidence to support this interpretation.
