A new DNB paper suggests that announcements by the U.S. Federal Open Market Committee on forward policy rate guidance have been credible and significantly reduced forward interest rates. Thus on average from 2008 to 2012, guidance announcements cut Eurodollar deposit rate 3 years forward by 14bps and 4-5 year forward Treasury yields by 20-21bps, over and above the impact of quantitative easing measures.

Effects of explicit FOMC policy rate guidance on market interest rates
DNB Working Paper, No. 384 / July 2013, Richhild Moessner
 
http://www.dnb.nl/en/binaries/Working%20Paper%20384_tcm47-294337.pdf

The below are excerpts from the report. Cursive text and emphasis have been added.

Characteristics of FOMC forward interest rate guidance

“Explicit policy rate guidance has become an important unconventional monetary policy tool for the FOMC, both for stimulating the economy while the policy rate is at the zero lower bound, and prospectively for contributing to managing an eventual exit from balance sheet policies.”

“On 16 December 2008 the FOMC introduced guidance that the federal funds rate would remain at exceptionally low levels “for some time”, which was altered to “for an extended period” on 18 March 2009, to “at least through mid-2013” on 9 August 2011, to “at least through late 2014” on 25 January 2012, and to “at least through mid-2015” on 13 September 2012. This date-based guidance was changed to threshold-based guidance of “at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored” on 12 December 2012.”

“After a new wording of the FOMC’s explicit policy rate guidance was introduced, for example that the FOMC ‘anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’, this or a similar wording was repeated in subsequent FOMC statements, until it was changed for a new wording. To capture the surprise component of the statements, we only consider those dates [given in the table below].”

The impact on Eurodollar futures
“As short- and medium-term market interest rates, we consider 3-month Eurodollar deposit interest rates implied by Eurodollar futures contracts expiring 0.25 to 5 years ahead…we can measure implied interest rates over a future time period directly from a traded contract…We also control for the effect of macroeconomic news on market interest rates by including surprises in 11 US macroeconomic indicators in the regressions.”

“We find that explicit policy rate guidance announcements significantly reduced interest rates implied by Eurodollar futures at horizons of 1 to 5 years ahead…The largest effect is present at the intermediate horizon of 3 years; on average, an individual announcement reduces 3-month Eurodollar futures rates by around 14 basis points. The reduction is smaller at the 1-year horizon, at 10 basis points…Daily changes in Eurodollar futures rates on the policy rate guidance announcement dates are shown [in the figure below], with those on dates not associated with asset purchase announcements shown as solid lines, and those on dates associated with asset purchase announcements shown as dashed lines.”

The impact on (forward) Treasury yields
“We also consider US Treasury instantaneous forward rates for short- to long-term horizons of 1 to 10 years ahead and US Treasury zero-coupon bond yields of maturities from 1 to 10 years…We find that explicit FOMC policy rate guidance not associated with asset purchase announcements leads to a significant reduction in US Treasury forward rates at horizons of 1 to 8 years ahead… with the reduction being largest at horizons of 4 and 5 years ahead, at 20-21 basis points on average per announcement. It is surprising that explicit FOMC policy rate guidance lowered US Treasury forward rates far into the future.”