Monetary policy and the secular decline in long-term interest rates: A global perspective

Summary

Focus

The global secular decline in long-term interest rates over the past three decades has been mainly linked to structural forces affecting the balance of saving and investment. We highlight US monetary policy announcements as a major factor contributing to the secular downward trend in long-term interest rates. 

Contribution

We assess the domestic and cross-border spillover effects of monetary policy announcements on long-run trends in long-term interest rates across all major advanced economies. We further explore the underlying mechanisms, assessing the role of pure monetary policy shocks vs central bank information shocks, of changes in expected short-term interest rates vs changes in term premia and of real interest rates vs inflation expectations.

Findings

We find that on average almost 70% of the secular decline in long-term interest rates across advanced economies between the early 1990s and 2023 occurred in the three days surrounding Federal Open Market Committee (FOMC) windows. By contrast, other central banks' announcements had only limited effects on the long-run direction of long-term interest rates, both domestically and across countries. The persistent global effect of the FOMC window reflects the combination of the concentration of declines in US bond yields in this window and large interest rate spillovers from the US to other countries. We further find that this relationship is driven by monetary policy shocks, changes in expected interest rates and changes in real interest rates rather than information effects, term premia or inflation expectations.

Abstract

We demonstrate that almost 70% of the secular decline in long-term interest rates across advanced economies between the early 1990s and 2023 occurred in the three days surrounding U.S. monetary policy announcements (FOMC windows). By contrast, other central banks' announcements had only limited effects, if any, on the long-run direction of long-term interest rates, both domestically and across countries. The persistent global effect of the FOMC window reflects the combination of the concentration of declines in U.S. bond yields in this window and large interest rate spillovers from the U.S. to other countries. We further find that the decline in interest rates during FOMC windows is closely associated with pure monetary policy shocks and not with information effects. Moreover, the rate decline on FOMC announcement days is primarily driven by changes in real and expected short rates rather than inflation expectations and term premia. These findings highlight the pivotal role of U.S. monetary policy news in shaping global long-term interest rate dynamics.

JEL classification: E43, E52, F42

Keywords: monetary policy, bond yields, interest rate trends, global financial cycle