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Fed Funds Rate Surprises and Financial Markets

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  • John Silvia
  • Azhar Iqbal
  • Alex Moehring

Abstract

This paper investigates the sensitivity of various financial markets to surprises in the federal funds rate. We employ the methodology outlined by Kuttner [2001] to reevaluate prior results and expand the analysis to include data up until the financial crisis, inclusive. Our data set includes additional events to previous studies, which led our results to differ than those earlier studies. For our sample excluding the financial crisis (1994–2007), we found that Fed funds surprises had a significant effect on the percent change in the S&P 500 index, but generally had little significant effect on Treasury yields and the trade-weighted dollar. We also studied a decomposition of the yield curve and found that the lack of significant effect on Treasury yields was a result of the offsetting effects of surprises on the term premium and risk-neutral yield. In addition, our analysis of the financial crisis revealed several shifts in the response of many asset classes, likely a result of the large signaling effects contained in monetary policy combined with the extraordinary events that were occurring.

Suggested Citation

  • John Silvia & Azhar Iqbal & Alex Moehring, 2016. "Fed Funds Rate Surprises and Financial Markets," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 51(1), pages 36-49, January.
  • Handle: RePEc:pal:buseco:v:51:y:2016:i:1:p:36-49
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