The Secular Decline in Long-Term Yields around FOMC Meetings

Abstract

Long-term U.S. Treasury yields fell by almost 8% between 1980 and 2017. I document that the entire decline in long-term interest rates was realized in a 3-day window around FOMC meetings. I find a similar pattern for U.S. equities: the same 3-day window can account for the entire decline in equity yields over the same time period. Decomposing the decline into an expected short-rate and a risk premium component, I find that the fall in long-term yields around FOMC meetings can be mostly attributed to a lower expected path for the future short rate. I argue that these results are surprising in light of theories on monetary policy and the secular decline in interest rates.