The Economics of the Fed Put

By Anna Cieślak, Annette Vissing-Jorgensen. The Review of financial studies, 2020

141 citations recorded by the source corpus.

Since the mid-1990s, negative stock returns comove with downgrades to the Fed’s growth expectations and predict policy accommodations. Textual analysis of FOMC documents reveals that policy makers pay attention to the stock market. The primary mechanism is their concern with the consumption wealth effect, with a secondary role for the market predicting the economy. We find little evidence of the Fed overreacting to the market in an ex post sense (reacting beyond the market’s effect on growth expectations). Although policy makers are aware that the Fed put could induce risk-taking, moral hazard considerations appear not to significantly affect their decision-making ex ante.

Subfields: Economics and Econometrics, Transportation

View Paper: https://www.semanticscholar.org/paper/c6bb4af0054b0126c9e72976fc0a467357dccb71

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Citations in the corpus

Treasury inconvenience yields during the COVID-19 crisis (2020, unknown): “More generally, Treasury bonds have had negative beta in recent decades, rising in price when stock prices fall (He, Krishnamurthy, and Milbradt (2019); Baele, Bekaert, Inghelbrecht, and Wei (2019); Campbell, Pflueger, and Viceira (2019)); Cieslak and Vissing-Jorgensen (2020)).”
Stock Market Wealth and the Real Economy: A Local Labor Market Approach (2019, methodology): “According to a recent textual analysis of FOMC transcripts by Cieslak and Vissing-Jorgensen (2017), many U.S. policymakers believe that stock market fluctuations affect the labor market through a consumption wealth effect. In this view, a decline in stock prices reduces the wealth of stock-owning ho”
Stock Market Returns and Consumption (2020, unknown): “In fact, concerns about the consumption-wealth effects of stock market returns have been the main driver of US monetary policy sensitivity to stock prices movements above any other macroeconomic news (Cieslak and Vissing-Jorgensen, 2017).”
The Voice of Monetary Policy (2021, unknown): “8 A similar approach was applied in Cieslak and Vissing-Jorgensen (2020) where a negative word accompanied by “not” is considered positive.”