The Economics of the Fed Put

70 Pages Posted: 14 Apr 2017 Last revised: 23 Mar 2019

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business

Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business

Date Written: September 1, 2018

Abstract

We document that since the mid-1990s low stock market returns predict accommodating policy by the Federal Reserve. We show that this fact emerges because, over this period, (i) negative stock returns are strongly correlated with downgrades to the Fed's growth expectations, and (ii) growth downgrades are highly significant in a Taylor rule framework. We use textual analysis of FOMC minutes and transcripts to argue for a causal effect of the stock market on the Fed's growth expectations and thereby on policy. We document that FOMC members pay attention directly to the stock market and view it as a causal factor for the economy. The primary mechanism, as perceived by the Fed, is the effect of the stock market on consumption (and to some extent investment); less attention is focused on the stock market simply predicting (as opposed to driving) the economy. The Fed's expectations updating is roughly in line with that of private sector forecasters and with the stock market's predictive power for realized growth and unemployment.

Keywords: Fed Put, Monetary Policy, Stock Market, Textual Analysis, Taylor Rules

JEL Classification: E52, G12

Suggested Citation

Cieslak, Anna and Vissing-Jorgensen, Annette, The Economics of the Fed Put (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=2951402 or http://dx.doi.org/10.2139/ssrn.2951402

Anna Cieslak (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919 660 7879 (Phone)

HOME PAGE: https://sites.google.com/site/ancieslak/

Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California Berkeley, Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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