Working Paper

Do actions speak louder than words? the response of asset prices to monetary policy actions and statements


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.

Keywords: Federal funds rate; Federal Open Market Committee; Securities; Asset pricing; Monetary policy;

Status: Published in International Journal of Central Banking, v. 1, no. 1 (May 2005) pp. 55-93

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2004

Number: 2004-66