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The Federal Reserve and market confidence

Nina Boyarchenko, Valentin Haddad () and Matthew Plosser ()
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Valentin Haddad: UCLA Anderson School of Management

No 773, Staff Reports from Federal Reserve Bank of New York

Abstract: We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions and market confidence. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage issuance, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy.

Keywords: policy announcement; risk premium; uncertainty; financial conditions (search for similar items in EconPapers)
JEL-codes: E44 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2016-04-01, Revised 2017-04-01
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