Michael T. Kiley

Federal Reserve policy

Monetary Policy Expectations

What markets expect from the Fed next, how Fed announcements move markets, and how that’s changed since rates hit zero — for stocks and for corporate borrowing costs, 1994 to today.

Extends two papers by economist Michael Kiley on how Fed announcements pass through to long‑term asset prices, using surprise moves in interest rates around FOMC meetings, before and after the zero lower bound: the Stocks tab covers the pass‑through to equity prices, the Corporate Bonds tab to corporate borrowing costs.

Equity pass‑through based on M.T. Kiley (2014), “The Response of Equity Prices to Movements in Long‑Term Interest Rates Associated with Monetary Policy Statements: Before and After the Zero Lower Bound,” Journal of Money, Credit and Banking, 46(5–6), 1057–1071.

Corporate bond pass‑through based on M.T. Kiley (2016), “Monetary Policy Statements, Treasury Yields, and Private Yields: Before and After the Zero Lower Bound,” Finance Research Letters, 18, 285–290.

Where markets expect the fed funds rate to go

The actual rate over the past month, plus what Fed funds futures are pricing in for the months ahead, compared across two dates so you can see how expectations have shifted (see legend for exact dates).

Actual rate Priced Priced

Rate probabilities, next contract 3+ months out

How confident the options market is about where rates will land for this contract, based on the prices traders are actually paying. Each pair of bars compares pricing on two dates (see legend).

Rate probabilities, December next year

The same view, further out -- for the contract covering the end of the last quarter of next year.

For informational purposes only. All downloads and calculations are the author’s own and may contain errors — don’t rely on this for decisions or conclusions. Verify independently with your own data and calculations before using it for any purpose. The analysis and views presented are the author’s own and do not reflect the views of any institution with which he is affiliated.
Rate expectations — the Fed funds futures curve and SOFR options‑implied probabilities are both settlement‑price data from CME Group, with the probabilities extracted using the risk‑neutral‑density method of Carlson, Craig, and Melick (2005). The actual fed funds rate history is FRED’s DFF series.
References
Carlson, Craig & Melick (2005), “Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures,” Federal Reserve Bank of Cleveland Working Paper No. 05‑07, published in Journal of Futures Markets (2005), 26(12), 1203–1242. — probability‑extraction method.

How much the Fed surprises markets

Each bar is one Fed meeting: how much near-term rate expectations moved (blue) and how much the 10-year Treasury yield moved (orange) in the half hour around the announcement. Shading marks periods when short-term rates were pinned near zero.

Near-term rate surprise 10-year Treasury surprise Near-zero rates (official dates) Near-zero rates (market-based)

Short rates, long rates, and inflation expectations

Each dot is one Fed meeting. Circles are normal times, triangles are near-zero-rate periods; the 8 most recent meetings are filled in and the latest is labeled. Right panel swaps the long-rate surprise for the market's inflation expectations (5-year breakeven).

Normal Near-zero Most recent (filled)
For informational purposes only. All downloads and calculations are the author’s own and may contain errors — don’t rely on this for decisions or conclusions. Verify independently with your own data and calculations before using it for any purpose. The analysis and views presented are the author’s own and do not reflect the views of any institution with which he is affiliated.
Data — Fed‑meeting surprises from the US Monetary Policy Event‑Study Database, 1994–present. A few announcements with no rate surprise attached are dropped, as are the six COVID‑shock meetings in March–April 2020, whose moves were extreme outliers.
Near‑zero rates, two ways — “official dates” is simply when the Fed’s target rate was at zero. “Market‑based” instead looks at how actively short‑term rates were being priced, since markets sometimes started expecting a move before — or kept expecting one after — the official change.
References
Acosta, Ajello, Bauer, Loria & Miranda‑Agrippino (2025), “Financial Market Effects of FOMC Communication,” Federal Reserve Bank of San Francisco Working Paper 2025‑30. — event‑study database.

How stocks react to rate surprises, over time

For every 8-year stretch of Fed meetings, how much a surprise move in the 10-year Treasury tends to move the S&P 500. The shaded band shows the margin of error; darker shading marks near-zero-rate periods.

10-year Treasury coefficient Near-zero rates (official dates) Near-zero rates (market-based)

Stocks: normal times vs. near-zero rates

The same estimate, compared directly for normal times and near-zero-rate periods, using two different ways of drawing that line.

For informational purposes only. All downloads and calculations are the author’s own and may contain errors — don’t rely on this for decisions or conclusions. Verify independently with your own data and calculations before using it for any purpose. The analysis and views presented are the author’s own and do not reflect the views of any institution with which he is affiliated.
Data — Fed‑meeting surprises from the US Monetary Policy Event‑Study Database, 1994–present. A few announcements with no rate surprise attached are dropped, as are the six COVID‑shock meetings in March–April 2020, whose moves were extreme outliers.
Near‑zero rates, two ways — “official dates” is simply when the Fed’s target rate was at zero. “Market‑based” instead looks at how actively short‑term rates were being priced, since markets sometimes started expecting a move before — or kept expecting one after — the official change.
Margins of error — the shaded band on the over‑time chart shows ±1 standard error; whiskers on the comparison chart show a wider ±1.96 (a 95% interval). The comparison chart also notes whether the normal‑vs‑near‑zero gap is likely more than noise (a formal test of whether the two estimates differ).
References
Acosta, Ajello, Bauer, Loria & Miranda‑Agrippino (2025), “Financial Market Effects of FOMC Communication,” Federal Reserve Bank of San Francisco Working Paper 2025‑30. — event‑study database.
M.T. Kiley (2014), “The Response of Equity Prices to Movements in Long‑Term Interest Rates Associated with Monetary Policy Statements: Before and After the Zero Lower Bound,” Journal of Money, Credit and Banking, 46(5–6), 1057–1071. — paper this tab extends.

How corporate borrowing costs react, over time

Same idea as the stock-market chart: for every 8-year stretch, how much a move in the 20-year Treasury tends to pass through to Moody's Baa and Aaa corporate bond yields.

Baa
Aaa
20-year Treasury coefficient Near-zero rates (official dates) Near-zero rates (market-based)

Corporate bonds: normal times vs. near-zero rates

The same comparison, for normal times and near-zero-rate periods, using two different ways of drawing that line.

For informational purposes only. All downloads and calculations are the author’s own and may contain errors — don’t rely on this for decisions or conclusions. Verify independently with your own data and calculations before using it for any purpose. The analysis and views presented are the author’s own and do not reflect the views of any institution with which he is affiliated.
Data — Fed‑meeting surprises from the US Monetary Policy Event‑Study Database, 1994–present. A few announcements with no rate surprise attached are dropped, as are the six COVID‑shock meetings in March–April 2020, whose moves were extreme outliers.
Corporate & Treasury yields — daily 10‑year and 20‑year Treasury, Moody’s Aaa and Baa corporate yields, from FRED (Federal Reserve Bank of St. Louis).
Near‑zero rates, two ways — “official dates” is simply when the Fed’s target rate was at zero. “Market‑based” instead looks at how actively short‑term rates were being priced, since markets sometimes started expecting a move before — or kept expecting one after — the official change.
Why a 20‑year Treasury for corporate bonds — following Kiley (2016), whose own check found the 20‑year yield explains corporate‑bond moves much better than the 10‑year does, especially since 2008.
Margins of error — the shaded bands on the over‑time charts show ±1 standard error; whiskers on the comparison charts show a wider ±1.96 (a 95% interval). Each comparison chart also notes whether the normal‑vs‑near‑zero gap is likely more than noise (a formal test of whether the two estimates differ).
References
Acosta, Ajello, Bauer, Loria & Miranda‑Agrippino (2025), “Financial Market Effects of FOMC Communication,” Federal Reserve Bank of San Francisco Working Paper 2025‑30. — event‑study database.
M.T. Kiley (2016), “Monetary Policy Statements, Treasury Yields, and Private Yields: Before and After the Zero Lower Bound,” Finance Research Letters, 18, 285–290. — paper this tab extends.