When Does the Fed Care About Stock Prices?
44 Pages Posted: 29 Aug 2018 Last revised: 31 May 2022
Date Written: May 25, 2022
We propose a novel identification approach based on a predictable change in the intraday volatility of index futures to estimate the Federal Reserve’s reaction to stock returns. This identification approach relies on a weaker set of assumptions than required under identification through heteroskedasticity based on lower frequency data. Our approach also allows the examination of changes in the reaction of monetary policy to the stock market. We document an asymmetric response of policy expectations to changes in stock prices in adverse and positive economic environments. Specifically, 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