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, a nd bond yields, using data from the futures market for Federal funds to sep arate changes in the target funds rate into anticipated and unanticipated c omponents. Interest rates' response to anticipated target rate changes is s mall, while their response to unanticipated changes is large and highly sig nificant. These responses are generally consistent with the expectations hy pothesis of the term structure. Surprise target rate changes have little ef fect 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. (C) 2001 Published by Elsevier Science B.V.