The Federal Reserve and Market Confidence
57 Pages Posted: 31 May 2016 Last revised: 12 Sep 2017
Date Written: 2016-04-01
We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions and market confidence. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage issuance, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy.
Keywords: policy announcement, risk premium, uncertainty, financial conditions
JEL Classification: E44, G12, G14
Suggested Citation: Suggested Citation