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Federal Reserve and Market Confidence

Author

Listed:
  • Nina Boyarchenko

    (Federal Reserve Bank of New York)

  • Matthew Plosser

    (Federal Reserve Bank of New York)

  • Valentin Haddad

    (University of California, Los Angeles)

Abstract

We discover a novel monetary policy shock that has a widespread impact on aggregate nancial conditions and market condence. Our shock can be summarized by the response of long-horizon yields to FOMC announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We nd that our shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage issuance, consistent with policy announcements aecting market condence. Our results demonstrate that Federal Reserve pronouncements in uence markets independent of changes in the stance of conventional monetary policy.

Suggested Citation

  • Nina Boyarchenko & Matthew Plosser & Valentin Haddad, 2018. "Federal Reserve and Market Confidence," 2018 Meeting Papers 781, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:781
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    References listed on IDEAS

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    Cited by:

    1. Kroencke, Tim & Schmeling, Maik & Schrimpf, Andreas, 2019. "The FOMC Risk Shift," CEPR Discussion Papers 14037, C.E.P.R. Discussion Papers.
    2. Andreas Neuhierl & Michael Weber & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo.
    3. Adrian, Tobias & Duarte, Fernando & Grinberg, Federico & Mancini-Griffoli, Tommaso, 2018. "Monetary Policy and Financial Conditions: A Cross-Country Study," CEPR Discussion Papers 12681, C.E.P.R. Discussion Papers.
    4. Ozdagli, Ali & Velikov, Mihail, 2020. "Show me the money: The monetary policy risk premium," Journal of Financial Economics, Elsevier, vol. 135(2), pages 320-339.
    5. Xin Zhang & Christoph Bertsch & Isaiah Hull, 2017. "Monetary Normalizations and Consumer Credit: Evidence from Fed Liftoff and Online Lending," 2017 Meeting Papers 442, Society for Economic Dynamics.
    6. Daniel J. Lewis, 2018. "Robust inference in models identified via heteroskedasticity," Staff Reports 876, Federal Reserve Bank of New York, revised 01 Aug 2019.
    7. Caporin, Massimiliano & Pelizzon, Loriana & Plazzi, Alberto, 2020. "Does monetary policy impact international market co-movements?," SAFE Working Paper Series 276, Leibniz Institute for Financial Research SAFE.
    8. Przemysław Włodarczyk, 2018. "Rynek pracy w modelu nowej syntezy neoklasycznej ze sztywnościami płac nominalnych," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 4, pages 51-92.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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