Monetary policy and the yield curve

The Federal Reserve's movement toward greater transparency in the mid-1990s offers a natural experiment that allows us to investigate the response of the yield curve level, slope and curvature to federal funds rate innovations. Prior to the mid-1990s the yield curve typically steepened in response to such innovations, indicating that financial market participants interpreted changes in the federal funds rate as a signal of the Fed's concern about inflation. Consistent with our hypothesis, since the mid-1990s, as the Fed moved toward greater transparency and as inflation expectations became better anchored, innovations in the federal funds rate have little or no effect on the yield curve slope.