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Can the Fed Talk the Hind Legs Off the Stock Market?

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Listed:
  • Sylvester Eijffinger

    (CentER and European Banking Center, Tilburg University, CEPR)

  • Ronald Mahieu

    (CentER and Netspar)

  • Louis Raes

    (CentER and European Banking Center, Tilburg University)

Abstract

This paper analyzes the impact of U.S. central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion, the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. We find that the stock prices of firms which have low cash flows, low returns to assets or equity, very high or low debt levels, small size, or which use more trade credit are affected more by central bank communication. Our evidence suggests that central bank communication by the Federal Open Market Committee has an impact on stocks and provides additional evidence for the demand and the credit channel.

Suggested Citation

  • Sylvester Eijffinger & Ronald Mahieu & Louis Raes, 2017. "Can the Fed Talk the Hind Legs Off the Stock Market?," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 53-94, February.
    • Handle: RePEc:ijc:ijcjou:y:2017:q:0:a:2
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    Cited by:

    1. Eijffinger, S.C.W., 2015. "Monetary dialogue 2009–2014 : Looking backward, looking forward," Other publications TiSEM b4d496af-6b5e-4290-9acd-0, Tilburg University, School of Economics and Management.
    2. Kontonikas, Alexandros & MacDonald, Ronald & Saggu, Aman, 2013. "Stock market reaction to fed funds rate surprises: State dependence and the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4025-4037.
    3. Mira Farka, 2022. "The credit channel of monetary policy before and after the zero lower bound: Evidence from the US equity market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 633-693, September.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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