Working Paper: CEPR ID: DP14685
Authors: Anna Cieslak; Annette Vissing-Jorgensen
Abstract: Since the mid-1990s, low stock returns predict accommodating policy by the Federal Reserve. This fact emerges because, over this period, negative stock returns comove with downgrades to the Fed's growth expectations. Textual analysis of the FOMC documents reveals that policymakers pay attention to the stock market, and their negative stock-market mentions predict federal funds rate cuts. The primary mechanism why policymakers find the stock market informative is via its effect on consumption, with a smaller role for the market viewed as predicting the economy.
Keywords: fed put; monetary policy; stock market; textual analysis; Taylor rules
JEL Codes: E44; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock market performance (G10) | Federal Reserve policy (E52) |
| 5% decrease in stock market (G17) | 14 basis point reduction in FFR target (E52) |
| 10% decline in stock market returns (G17) | 32 basis point reduction in FFR target (E52) |
| Negative stock market mentions (G10) | Future federal funds rate cuts (E52) |
| Negative stock returns (G12) | Monetary easing (E52) |
| Positive stock mentions (G10) | No correlation with tightening (E32) |
| Stock market fluctuations (E32) | Consumption effect (D12) |
| Stock market mentions (G10) | Causal effect on economy (F69) |