Global asset prices and FOMC announcements

Abstract

This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short-and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the path of future monetary policy (path surprise). We find that different asset classes respond to different components of the monetary policy surprises. Global equity indexes respond mainly to the target surprise; exchange rates and long-term interest rates respond mainly to the path surprise; and short-term interest rates respond to both surprises. On average, a hypothetical surprise 25-basis-point cut in the federal funds target rate is associated with about a 1 percent increase in foreign equity indexes and a 5 basis point decline in foreign short-term interest rates. A surprise 25-basis-point downward revision in the path of future policy is associated with about a ½ percent decline in the exchange value of the dollar against foreign currencies and 5 and 8 basis points declines in short-and long-term interest rates, respectively. We also find that asset prices' responses to FOMC announcements vary greatly across countries, and that these cross-country variations in the response are related to a country's exchange rate regime. Equity indexes and interest rates in countries with a less flexible exchange rate regime respond more to U.S. monetary policy surprises. In addition, the crosscountry variation in the equity market response is strongly related to the percentage of each country's equity market capitalization owned by U.S. investors (a financial linkage), and the cross-country variation in short-term interest rates' responses is strongly related to the share of each country's trade that is with the United States (a real linkage).Keywords: monetary policy announcements, equity markets, interest rates, exchange rates, exchange rate regime JEL Classification: E44, E52, G14, G15 * Research assistant and economist, respectively, in the Division of International Finance of the Board of Governors of the Federal Reserve System. We thank Refet Gürkaynak for providing monetary policy announcement surprises data. We thank Sigga Benediktsdottir, Mark Carey, Joe Gagnon, John Rogers, Chiara Scotti, and Clara Vega and seminar participants in the FRB Finance Forum for helpful comments and suggestions and Bruce Gilsen for frequent help with SAS. Of course, we take responsibility for any and all errors. For questions and comments, please contact

International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada

“…Kim (2001), Hausman andWongswan (2011), andKazi, Wagan, andAkbar (2013) show that conventional monetary policy shocks in the United States have particularly strong effects on Canadian yields. In particular, Hausman and Wongswan (2011) show that surprises to both the current policy rate and the expected path of future rates in the United States have comparable effects on Canadian long-term rates as they do on U.S. long-term rates. Kazi, Wagan, and Akbar (2013) show that a 100 bps tightening of U.S. policy rates lead to an increase in short-term rates of 70 to 100 bps and in long-term rates by 60 to 90 bps in remaining OECD countries, including Canada.…”

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