Fed Information Effects: Evidence from the Equity Term Structure
60 Pages Posted: 29 Apr 2021 Last revised: 7 Dec 2023
Date Written: December 1, 2023
Abstract
Do investors interpret central bank target rate decisions as signals about the current state
of the economy? We study this question using a short-term equity asset that entitles the owner
to the near-term dividends of the aggregate stock market. We develop a stylized model of
monetary policy and the equity term structure and derive tests of Fed information effects using
the short-term asset announcement return. Consistent with the existence of information effects,
we find that the short-term asset return in a 30-minute window around FOMC announcements
loads positively on monetary policy surprises. Furthermore, the announcement return predicts
near-term macroeconomic growth.
Keywords: information effects, term structure, asset pricing
JEL Classification: E50, G10
Suggested Citation: Suggested Citation