Market Confidence and Monetary Policy
38 Pages Posted: 2 Dec 2015 Last revised: 8 Dec 2015
Date Written: December 7, 2015
We study the ability of monetary policy announcements to influence interest rates at all maturities as well as asset prices more broadly. Using a novel methodology, we discover two distinct monetary policy shocks. The primary factor is a long rate factor which we find is related to aggregate uncertainty; the second factor is a traditional Fed funds short-rate shock. We show that the two factors have disparate effects on risky asset returns, with the long rate factor affecting the aggregate risk premium, and the Fed funds shock lowering inflation expectations and increasing the value premium. Our results highlight that monetary policy announcements influence market confidence even when there is no change in the stance of monetary policy.
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