Working Papers

2019-12 | December 2019


Market-Based Monetary Policy Uncertainty


An extensive literature studies the impact of monetary policy surprises-shifts in expected policy rates-on asset prices. This paper addresses the open question of how shifts in the uncertainty about future policy rates matter for the transmission of monetary policy to financial markets. To this end, we develop a novel measure of policy uncertainty based on derivative prices that can be used in event studies. We provide evidence for an FOMC uncertainty cycle, the systematic pattern of resolution of uncertainty on FOMC announcement days followed by a gradual ramp-up over the next two weeks. Furthermore, specific monetary policy actions have differential effects on uncertainty, with the most substantial shifts due to changes in the forward guidance provided by the FOMC. Changes in uncertainty have pronounced effects on asset prices, distinct from the effects of changes in expected policy rates. Moreover, the prevailing level of uncertainty determines the effectiveness of policy surprises: When uncertainty is low, monetary policy surprises have stronger effects on asset prices.

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Article Citation

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