Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements

by Refet S Gürkaynak^a,c, Brian Sack^b and Eric T Swanson^c

Abstract

We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

JEL Codes: E52, E58, E43, G14.

 
Full article (PDF, 39 pages 335 kb)
Data appendix to the article (PDF, 7 pages 126 kb)

^a Department of Economics, Bilkent University, Ankara, Turkey
^b Macroeconomic Advisers, LLC, Washington DC
^c Division of Monetary Affairs, Federal Reserve Board, Washington DC