Has The Effect of Monetary Policy Announcements On Asset Prices Changed?

Abstract

The Federal Reserve has relied increasingly on communication to implement monetary policy. In addition to setting an intermeeting target for the federal funds rate, the Federal Open Market Committee (FOMC)—the Federal Reserve’s principal policymaking body—conveys information about the likely future path of the federal funds rate. As the target funds rate reached its effective lower bound during the recent financial crisis—limiting its usefulness as a policy tool—the FOMC began to increase its use of forward guidance about the likely path of the federal funds rate. The greater use of forward guidance as a policy tool has focused attention on its effectiveness in influencing the real economy. A key gauge of the usefulness of policy guidance is the response of asset prices, the channel through which monetary policy is transmitted to the real economy. Changes in policy guidance affect the private sector’s expectations about the future path of the federal funds rate, and those expectations i