Keywords: Measuring monetary policy surprises, FOMC statement, factor models, assest prices
Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency
event-study analysis. We test whether these effects are adequately
captured by a single factor--changes in the federal funds rate target-and find
that they are not. Instead, we find that two factors are required. These factors
have a structural interpretation as a "current federal funds rate target" factor and
a "future path of policy" factor, with the latter closely associated with FOMC
statements. We measure the effects of these two factors on bond yields and
stock prices using a new intraday dataset going back to 1990. According to our
estimates, both monetary policy actions and statements have important but
differing effects on asset prices, with statements having a much greater impact
on longer-term Treasury yields.
Full paper (613 KB PDF)
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Last update: December 2, 2004