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

Benjamin Knox () and Annette Vissing-Jorgensen ()
Additional contact information
Benjamin Knox: Board of Governors of the Federal Reserve System, Washington, DC, USA
Annette Vissing-Jorgensen: Board of Governors of the Federal Reserve System, Washington, DC, USA

Annual Review of Financial Economics, 2025, vol. 17, issue 1, 267-294

Abstract: We survey and extend work on the Federal Reserve's effect on the stock market, focusing on three empirical facts: 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 (equity premia for news from the Fed, or changes to yields, equity premia, or expected dividends). We also consider the information transmission 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. Informal information flows outside announcements windows are important.

Keywords: stock prices; monetary policy; stock return decomposition; Fed information effect; FOMC; reaction function (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1146/annurev-financial-090524-120826
Full text downloads are only available to subscribers. Visit the abstract page for more information.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:anr:refeco:v:17:y:2025:p:267-294

Ordering information: This journal article can be ordered from
http://www.annualreviews.org/action/ecommerce

DOI: 10.1146/annurev-financial-090524-120826

Access Statistics for this article

More articles in Annual Review of Financial Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA.
Bibliographic data for series maintained by http://www.annualreviews.org ().