Working Papers

2019-12 | February 2021


Market-Based Monetary Policy Uncertainty

Author(s): Michael Bauer, Aeimit Lakdawala, and Philippe Mueller

Uncertainty about future policy rates plays a crucial role for the transmission of monetary policy to financial markets. We demonstrate this using event studies of FOMC announcements and a new model-free uncertainty measure based on derivatives. Over the “FOMC uncertainty cycle” announcements systematically resolve uncertainty, which then gradually ramps up again over the subsequent two weeks. Changes in monetary policy uncertainty around FOMC announcements-often due to new forward guidance-have pronounced effects on asset prices that are distinct from the effects of conventional policy surprises. Furthermore, the level of uncertainty determines the magnitude of the financial market reaction to surprises about the path of policy rates.

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Article Citation

Bauer, Michael, Aeimit Lakdawala, and Philippe Mueller. 2021. "Market-Based Monetary Policy Uncertainty," Federal Reserve Bank of San Francisco Working Paper 2019-12. Available at