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

Multiple version iconThere are 2 versions of this paper

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

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Kenneth N. Kuttner (Contact Author)

Williams College ( email )

326 Schapiro Hall
24 Hopkins Hall Drive
Williamstown, MA 01267
United States
413-597-2300 (Phone)

HOME PAGE: http://econ.williams.edu/people/knk1

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
208
Abstract Views
10,154
Rank
36,995
PlumX Metrics