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This study aims to address the fundamental question on how the major players in the economy dynamically interact with each other: among the central bank, the investors in the bond market and the firms and consumers that contribute to the economic growth, who gets information from whom, when and why?

To answer “who follows whom,” the authors apply a novel technique to examine the lead–lag relations between three time series, the federal funds rate, the treasury yield curve and the gross domestic product (GDP). To investigate “when and why,” the authors combine the lead–lag relations with principal component analysis to cluster economic states that are similar with respect to the eight macroeconomic variables.

The authors show that during the period 1977–2019, the bond market potentially obtained information from the federal funds rate (61% of the time) and less often (34% of time) from the changes in the GDP. Meanwhile, the funds rate decision by the Federal Reserve seems to lead the economic growth about 63% of the time. The analysis also suggests that the bond market obtained information directly from GDP when unemployment and inflation was high. In addition, the authors find that the federal funds rate was leading the GDP when the GDP deviated from the target value, consistent with the Federal Reserve’s policy of boosting and damping the economy when the GDP growth is low or high, respectively.

This study provides insights into the fundamental questions that have important implications for empirical work on the monetary policy, financial stability and economic activities.