Monetary Policy Communication, Policy Slope, and the Stock Market
89 Pages Posted: 18 Mar 2016 Last revised: 31 Jul 2019
Date Written: July 2019
The slope factor is constructed from changes in federal funds futures of different horizons and predicts stock returns at the weekly frequency: faster policy easing positively predicts returns. It contains information about the speed of future monetary policy tightening and loosening, and predicts changes in interest rates and forecast revisions of professional forecasters. The tone of speeches by FOMC members correlates with the slope factor. The predictive power concentrates in times of high uncertainty in line with the pre-FOMC announcement drift. Our findings show the path of interest rates matters for asset prices, and monetary policy affects asset prices continuously.
Keywords: Policy Speeches, Macro News, Return Predictability, Expected Returns
JEL Classification: E31, E43, E44, E52, E58, G12
Suggested Citation: Suggested Citation