Bond market response to FOMC communication: Overreaction to Forward Guidance and Diagnostic Expectations
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I document a negative correlation between the response of medium-term (1yr-5yr) treasury yields to FOMC announcements and those to the release of the corresponding minutes. Using the factor-decomposition in Swanson (2021), I interpret these as bond market overreaction to forward guidance information contained in announcements, with a revision followed by the release of FOMC minutes. I explain this observation using a model of diagnostic expectations. Working draft