Abstract Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel. * We thank John Campbell, Gene Fama, Emmanuel Farhi, Robin Greenwood, Anil Kashyap, David Scharfstein, Larry Summers, Adi Sunderam, Paul Tucker, Luis Viceira, and seminar participants at Harvard University for helpful comments. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the Board of Governors.
