Conventional wisdom is that an increase in the target Fed funds rate leads to an imme- diate increase in market interest rates, and a fall in bond prices; yet evidence for this view is elusive. Cook and Hahn (1989) documented a strong response in the 1970s, but regressions using data from the 1980s and 1990s show little, if any, impact of Fed policy on interest rates. Roley and Sellon (1995), for example, conclude that “although casual observation suggests a close connection:::, the relationship between Fed actions and long-term interest rates appears much looser and more variable.” These studies did not distinguish between anticipated and unanticipated actions, however,.
