Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock

Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. The non-yield shock has large effects on global markets, with a positive non-yield shock raising U.S. and foreign stock prices, depreciating the dollar, and increasing commodity prices. At the same time, the shock leaves global yields unaffected. Further results indicate that the non-yield shock transmits mostly through risk premia. The existence of the non-yield shock generally has implications for how monetary policy shocks can be identified, raising concerns about the validity of many common approaches.