Forward Guidance, Monetary Policy Uncertainty, and the Term Premium

July 12, 2017
By Brent Bundick, Research and Policy Advisor , A. Lee Smith, Research and Policy Advisor and Trenton Herriford

Research Working PaperForward guidance about future monetary policy can materially affect term premia in bond markets, even without large-scale asset purchases.

When the Federal Reserve provides greater clarity about the path of future interest rates, term premia in longer-term bonds fall and economic activity increases. This interest rate uncertainty channel of forward guidance sheds light on three important issues in macroeconomics. First, this channel explains how forward guidance shapes term premia, both away from and at the zero lower bound. Second, our mechanism offers a novel explanation for the puzzling fact that monetary policy announcements affect distant real forward rates. Finally, we show that event studies overstate the effects of large-scale asset purchases when they fail to control for simultaneous forward guidance.

Download paper, RWP 17-07, July 2017; Updated December 2019 

Additional Files:  Appendix

JEL Classification: E32; E52

Article Citation

  • Bundick, Brent, Trenton Herriford and A. Lee Smith. “Forward Guidance, Monetary Policy Uncertainty, and the Term Premium,” Federal Reserve Bank of Kansas City working paper no. 17-07, July, available at

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