What Explains the Stock Market's Reaction to Federal Reserve Policy?

57 Pages Posted: 16 Apr 2004 Last revised: 5 Jun 2022

See all articles by Ben S. Bernanke

Ben S. Bernanke

Board of Governors of the Federal Reserve System

Kenneth N. Kuttner

National Bureau of Economic Research (NBER); Williams College

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Date Written: April 2004

Abstract

This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives both of measuring the average reaction of the stock market and also of understanding the economic sources of that reaction. We find that, on average, a hypothetical unanticipated 25-basis-point cut in the federal funds rate target is associated with about a one percent increase in broad stock indexes. Adapting a methodology due to Campbell (1991) and Campbell and Ammer (1993), we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.

Suggested Citation

Bernanke, Ben S. and Kuttner, Kenneth N. and Kuttner, Kenneth N., What Explains the Stock Market's Reaction to Federal Reserve Policy? (April 2004). NBER Working Paper No. w10402, Available at SSRN: https://ssrn.com/abstract=528983

Ben S. Bernanke

Board of Governors of the Federal Reserve System

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Kenneth N. Kuttner (Contact Author)

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