Fifth Factor: Monetary Policy with Resolution

Abstract

When the FOMC announces its policy decisions with a clear objective and a projected rate path, monetary policy uncertainty declines, amplifying financial markets' reactions to policy surprises. In particular, short-and long-term Treasury yields, risk appetite, and private credit spreads respond more strongly to monetary policy surprises with clearly-perceived policy resolution. As a consequence, economic activity is significantly affected through the "risk-taking" channel of monetary policy transmission. These findings are obtained from a novel resolution factor extracted from high-frequency asset prices, including the implied volatility of future interest rate, around FOMC announcements.

Keywords: Monetary Policy Surprise, Monetary Policy Uncertainty, High-frequency Asset Prices

JEL Classification: E58, E44