Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements
43 Pages Posted: 19 Dec 2004
Date Written: November 2004
We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor - changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a current federal funds rate target factor and a future path of policy factor, with the latter closely associated with FOMC statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday dataset going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.
Keywords: Measuring monetary policy surprises, FOMC statement, factor models, assest prices
JEL Classification: E43, E44, E52, E58
Suggested Citation: Suggested Citation