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 highfrequency 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.

Comparison of Monetary Policy Actions and Central Bank Communication on Tackling Asset Price Bubbles—Evidence from China’s Stock Market

“…Our results are in line with Gürkaynak et al [21], who define central bank communication as the ‘future path’ factor of monetary policy and has relatively long-term effects on the economy. Sarno and Taylor [42] and Fratzscher [17] argue that central bank communication is able to reduce heterogeneity in the market’s information and expectations, and induce asset prices to move closely to the underlying fundamentals, which is called the ‘coordination channel’.…”

“…Previous studies generally believe that communication has more significant effects on the long-term yields by influencing the market expectations [21, 22]. Kliesen and Schmid [23] study the different effects of them on inflation expectation and conclude that Federal Reserve communication reduces uncertainty about the future rate of inflation, whereas surprises in monetary policy actions increase uncertainty about the path of the inflation rate.…”

US shocks and global exchange rate configurations

“…As to the specific sources, US monetary policy shocks stem from Gürkaynak et al (2005) and are the changes of the Fed funds futures in the 30-minute window around Macroeconomic releases are sourced from S&P and Bloomberg, while the expectations of these releases come from Money Market Services (MMS) International and Bloomberg. Most of these releases are monthly in frequency, with the exception of quarterly advance GDP announcements and monetary policy announcements which nowadays usually occur 8 times per year.…”

“…Summary statistics of macroeconomic surprises and announcementsSource: MMS International, S&P and Bloomberg for macroeconomics variables;Gürkaynak et al (2005) for the monetary policy variable.Federal Open Markets Committee (FOMC) announcements.Table 1shows that there are 177 policy surprises in the sample, with the mean surprises being 5.7 basis points. Some policy announcements have been excluded from the sample, in particular those related to the 11 September 2001 event.…”

Why do markets react to words?

“…This paper refers to the modern view of a central bank which can be summarized by the statement that monetary policy is "steering market expectations" (Blinder et al, 2008;Gürkaynak et al, 2005;Woodford, 2005). The modern view emphasizes that a "central bank owes the public transparency and accountability".…”