Staff Reports
Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates
Number 934
July 2020

JEL classification: D83, D84, E43, G10, G12

Authors: Shuo Cao, Richard K. Crump, Stefano Eusepi, and Emanuel Moench

Using a unique data set of individual professional forecasts, we document disagreement about the future path of monetary policy, particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits U.S. Treasury yields and the short rate paths predicted by different groups of professional forecasters very well. About one-third of the variation in term premiums is driven by short rate disagreement.

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AUTHOR DISCLOSURE STATEMENT(S)
Shuo Cao
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates,” joint with Richard Crump, Stefano Eusepi, and Emanuel Moench.

Richard K. Crump
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates,” joint with Shuo Cao, Stefano Eusepi, and Emanuel Moench. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Stefano Eusepi
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates,” joint with Shuo Cao, Richard Crump, and Emanuel Moench.

Emanuel Moench
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates,” joint with Shuo Cao, Richard Crump, and Stefano Eusepi.