Market Reactions to the Federal Reserve's Balance Sheet Normalization Plans

Abstract

This paper focuses on interpreting the stock market's reactions to Federal Reserve announcements about its balance sheet normalization plans, applying the methodology developed with Francesco Bianchi and Sai Ma. The results indicate that the stock market declines after announcements, suggesting perceived inflexibility in statements about balance sheet normalization, but many of the large reactions to these announcements can be ascribed to forces that move the stock market but not the broader economy.