Monetary Policy Surprises and Interest Rates: Choosing between the Inflation-Revelation and Excess Sensitivity Hypotheses

Romer and Romer (R&R) reported that federal funds rate increases may raise expected inflation by revealing the Fed's private information about inflation. Gurkaynak, Sack, and Swanson (GSS) presented evidence that funds rate increases lowered long-term expected inflation. To choose between these hypotheses we examine how monetary policy surprises affect daily traded commodity prices, term interest rates, and forward interest rates. We find that funds rate increases in the 1970s raised gold and silver prices and that increases after 1989 lowered gold and silver prices. We also find that funds rate hikes over both sample periods primarily affected short-term interest rates and near-term forward rates. For the 1970s, these results suggest that R&R's explanation is correct. For recent years, they indicate that funds rate increases affect real rates and may also be consistent with GSS's findings.