IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

What explains the stock market's reaction to Federal Reserve policy?

  • Ben Bernanke
  • Kenneth N. Kuttner

This paper analyzes the impact of unanticipated changes in the Federal funds target on equity prices, with the aim of both estimating the size of the typical reaction, and understanding the reasons for the market's response. On average over the May 1989 to December 2001 sample, a "typical" unanticipated 25 basis point rate cut has been associated with a 1.3 percent increase in the S&P 500 composite index. The estimated response varies considerably across industries, with the greatest sensitivity observed in cyclical industries like construction, and the smallest in mining and utilities. Very little of the market's reaction can be attributed to policy's effects on the real rate of interest or future dividends, however. Instead, most of the response of the current excess return on equities can be traced to policy's impact on expected future excess returns.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.frbsf.org/economics/conferences/0303/kuttnerdraft_02-07-03.pdf
Download Restriction: no

Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2003)
Issue (Month): Mar ()
Pages:

as
in new window

Handle: RePEc:fip:fedfpr:y:2003:i:mar:x:1
Contact details of provider: Postal: P.O. Box 7702, San Francisco, CA 94120-7702
Phone: (415) 974-2000
Fax: (415) 974-3333
Web page: http://www.frbsf.org/Email:


More information through EDIRC

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  2. Faust, Jon & Swanson, Eric T. & Wright, Jonathan H., 2004. "Identifying VARS based on high frequency futures data," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1107-1131, September.
  3. Faust Jon & Swanson Eric T & Wright Jonathan H, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-31, October.
  4. Ray C. Fair, 2000. "Events that Shook the Market," Yale School of Management Working Papers ysm149, Yale School of Management.
  5. Roberto Rigobon & Brian Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series 2002-4, Board of Governors of the Federal Reserve System (U.S.).
  6. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
  7. Willem Thorbecke, 1995. "On Stock Market Returns and Monetary Policy," Economics Working Paper Archive wp_139, Levy Economics Institute.
  8. John Y. Campbell, 1990. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  9. Campbell, J.Y. & Ammer, J., 1991. "What Moves The Stock And Bond Markets? A Variance Decomposition For Long- Term Asset Returns," Papers 127, Princeton, Department of Economics - Financial Research Center.
  10. John H. Boyd & Ravi Jagannathan & Jian Hu, 2001. "The Stock Market's Reaction to Unemployment News: Why Bad News is Usually Good for Stocks," NBER Working Papers 8092, National Bureau of Economic Research, Inc.
  11. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  12. Nelson, Charles R & Kim, Myung J, 1993. " Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, vol. 48(2), pages 641-61, June.
  13. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  14. John Y. Campbell & Tuomo Vuolteenaho, 2002. "Bad Beta, Good Beta," Harvard Institute of Economic Research Working Papers 1971, Harvard - Institute of Economic Research.
  15. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction Of Monetary Policy To The Stock Market," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 639-669, May.
  16. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  17. Jeff Fuhrer & Geoff Tootell, 2004. "Eyes on the prize: how did the Fed respond to the stock market?," Public Policy Discussion Paper 04-2, Federal Reserve Bank of Boston.
  18. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  19. Brandt, Michael W. & Wang, Kevin Q., 2003. "Time-varying risk aversion and unexpected inflation," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1457-1498, October.
  20. Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
  21. John H. Cochrane & Monika Piazzesi, 2002. "The Fed and Interest Rates: A High-Frequency Identification," NBER Working Papers 8839, National Bureau of Economic Research, Inc.
  22. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  23. d'Amico, Stefania & Mira Farka, 2003. "The Fed and Stock Market: A Proxy and Instrumental Variable Identification," Royal Economic Society Annual Conference 2003 52, Royal Economic Society.
  24. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 0354, European Central Bank.
  25. Charles Evans & Kenneth Kuttner, 1998. "Can VARs describe monetary policy?," Research Paper 9812, Federal Reserve Bank of New York.
  26. Goto, Shingo, 2000. "The Fed's Effect on Excess Returns and Inflation is Much Bigger Than You Think," University of California at Los Angeles, Anderson Graduate School of Management qt04f1z5hb, Anderson Graduate School of Management, UCLA.
  27. Joel T. Krueger & Kenneth N. Kuttner, 1995. "The Fed funds futures rate as a predictor of Federal Reserve policy," Working Paper Series, Macroeconomic Issues 95-4, Federal Reserve Bank of Chicago.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedfpr:y:2003:i:mar:x:1. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.