The Federal Reserve and Market Confidence

57 Pages Posted: 31 May 2016 Last revised: 12 Sep 2017

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: 2016-04-01

Abstract

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

Boyarchenko, Nina and Haddad, Valentin and Plosser, Matthew C., The Federal Reserve and Market Confidence (2016-04-01). FRB of NY Staff Report No. 773. Available at SSRN: https://ssrn.com/abstract=2786192

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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