When Does the Fed Care About Stock Prices?
36 Pages Posted: 29 Aug 2018 Last revised: 26 May 2019
Date Written: May 24, 2019
We use a predictable change in the intraday volatility of index futures to identify the effect of stock returns on monetary policy. This identification approach relies on a weaker set of assumptions than required under identification through heteroskedasticity based on lower frequency data. Our identification approach also allows examination of time variation in the reaction of monetary policy to the stock market. The results show a sharp increase in the response of monetary policy expectations to stock returns during recessions and bear markets. This finding is consistent with the existence of the so-called “Fed put.”
Keywords: Monetary Policy, Stock Returns, Intraday Data, Futures, Identification, Heteroskedasticity
JEL Classification: E44, E52, E58, G14, G18
Suggested Citation: Suggested Citation