The Effect of the Federal Reserve on the Stock Market: Magnitudes, Channels and Shocks

Benjamin Knox and Annette Vissing-Jorgensen

No 2026-023, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We survey and extend work on the Federal Reserve’s effect on the stock market, focusing on three empirical findings: The effect of monetary policy surprises in a narrow window around announcements from the Federal Open Market Committee (FOMC), the pre-FOMC announcement drift, and the FOMC cycle in stock returns. We discuss the magnitude of the Fed’s impact (directional effects or effects on average stock returns), the types of shocks coming from the Fed (pure monetary policy shocks, reaction function news, or information about the Fed’s view of the economy), and the asset pricing channels through which effects emerge (an equity premia for news from the Fed, or changes to yields, equity premia, or expected dividends). We also consider the information transmission (communication) channels. The Fed’s effect on the stock market is large, even for average stock returns earned over periods of several decades. Fed-induced changes to both yields and equity premia play substantial roles, with less direct evidence available regarding cash flows. For stocks, reaction function news appears to be more important than Fed information effects. Communication flows outside announcements windows are important.

Keywords: asset pricing; monetary policy transmission; Federal Open Market Committee (FOMC); monetary policy communication; risk premiums (search for similar items in EconPapers)
JEL-codes: E52 G10 G12 (search for similar items in EconPapers)
Pages: 29 p.
Date: 2026-05-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:103197

DOI: 10.17016/FEDS.2026.023

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