Working Paper

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

Abstract: 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. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks.

Keywords: Federal Reserve; Monetary Policy; Stock Market; Exchange Rates; Asset Prices; Risk Premia; Information Effects; High-frequency Identification;

JEL Classification: E43; E44; E52; E58; F31; G10;

https://doi.org/10.17016/IFDP.2024.1392

Bibliographic Information

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

Part of Series: International Finance Discussion Papers

Publication Date: 2024-07-18

Number: 1392