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Tough Talk: The Fed and the Risk Premium

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  • Cieslak, Anna
  • McMahon, Michael

Abstract

We study how monetary policy affects financial risk premia. Unlike existing studies, we focus on the Federal Open Market Committee’s (FOMC’s) forward-looking policy stance, beyond the current announcement and macroeconomic forecasts, which we derive from the policymakers’ private deliberations. A more hawkish policymakers’ stance in the FOMC meeting predicts lower risk premia during the intermeeting period. This effect is not explained by the content of the FOMC statement and unfolds gradually after the announcement. We document the importance of intermeeting communication via speeches and minutes to show how communicating forward-looking stance is vital in managing policy-induced risk perceptions.

Suggested Citation

  • Cieslak, Anna & McMahon, Michael, 2024. "Tough Talk: The Fed and the Risk Premium," CEPR Discussion Papers 19313, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:19313
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