Fed Information Effects: Evidence from the Equity Term Structure

Abstract

Do investors interpret central bank target rate decisions as signals about the current state of the

economy? We study this question using a short-term equity asset that entitles the owner to the

near-term dividends of the aggregate stock market. We develop a stylized model of monetary policy

and the equity term structure and derive tests of Fed information effects using the short-term

asset announcement return. Consistent with the existence of information effects, we find that the

short-term asset return in a 30-minute window around FOMC announcements loads positively on

monetary policy surprises. Furthermore, the announcement return predicts near-term macroeconomic

growth.

Keywords: information effects, term structure, asset pricing

JEL Classification: E50, G10