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Federal Reserve and Market Confidence

Nina Boyarchenko, Matthew Plosser and Valentin Haddad
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Matthew Plosser: Federal Reserve Bank of New York
Valentin Haddad: University of California, Los Angeles

No 781, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We discover a novel monetary policy shock that has a widespread impact on aggregate nancial conditions and market condence. Our shock can be summarized by the response of long-horizon yields to 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 nd 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 aecting market condence. Our results demonstrate that Federal Reserve pronouncements in uence markets independent of changes in the stance of conventional monetary policy.

Date: 2018
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