Using Fed funds futures rates to disentangle expected from unexpected policy actions, this paper shows that interest rates’ response to the “surprise” component of Fed policy is significantly stronger than the response to the change in the target itself; in fact, rates’ response to the anticipated component of policy actions is minimal, consistent with the efficient markets hypothesis. The response of Fed funds futures rates themselves to unex- pected policy actions is fairly uniform across the one- to five-month horizon, supporting the view that the short end of the term structure contains little information about future movements in short-term rates
