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Has the effect of monetary policy announcements on asset prices changed?

  • Doh, Taeyoung

    (Federal Reserve Bank of Kansas City)

  • Connolly, Michael

The Federal Reserve increasingly has relied on forward guidance about the future path of the federal funds rate to implement monetary policy since the federal funds target rate reached its effective lower bound. The enhanced use of forward policy guidance has drawn attention to any change in its influence on the real economy. Changes in policy guidance affect the private sector’s expectations about the future path of the federal funds rate and, in turn, affect bond yields, stock prices and asset values. Changes in asset values influence real activity through their effects on spending by consumers and businesses. Doh and Connolly find a weakened response by stock prices and bond yields to the increased use of policy guidance since the recent financial crisis. Longer-term bond yields became less responsive because a prolonged period of the low interest rate reduced the variability of medium-term expectations; stock prices became less responsive because investors revised down their economic outlook in response to some announcements of a more accommodative monetary policy.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2013)
Issue (Month): Q III ()
Pages: 31-65

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Handle: RePEc:fip:fedker:00009
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  1. Ben S. Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Staff Reports 174, Federal Reserve Bank of New York.
  2. Refet Gürkaynak & Brian Sack & Eric Swanson, 2004. "Do actions speak louder than words? the response of asset prices to monetary policy actions and statements," Finance and Economics Discussion Series 2004-66, Board of Governors of the Federal Reserve System (U.S.).
  3. Brian Sack, 2004. "Extracting the Expected Path of Monetary Policy From Futures Rates," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(8), pages 733-754, 08.
  4. Faust, Jon & Wright, Jonathan H., 2009. "Comparing Greenbook and Reduced Form Forecasts Using a Large Realtime Dataset," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 468-479.
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