The Economics of the Fed Put

94 Pages Posted: 14 Apr 2017 Last revised: 17 Jun 2020

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Annette Vissing-Jorgensen

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2018

Abstract

Since mid-1990s, negative stock returns comove with downgrades to the Fed's growth expectations and predict policy accommodations. Textual analysis of FOMC documents reveals that policymakers pay attention to the stock market. The primary mechanism is policymakers’ concern with the consumption-wealth effect, with a secondary role for the market viewed as a predictor of the economy. We find little evidence of the Fed overreacting to the market in an ex-post sense (reacting beyond the market's effect on growth expectations). Although policymakers are aware that the Fed put could induce risk-taking, moral-hazard considerations do not appear to significantly affect their decision-making ex-ante.

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 )

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National Bureau of Economic Research (NBER) ( email )

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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 )

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2220 Piedmont Avenue
Berkeley, CA 94720
United States

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