Unconventional Times and Unconventional Reactions: The Effects of U.S Monetary Policy Announcements on Financial Markets


By using the event study technique with the two proxies for monetary policy surprises which are the target surprise and the path surprise it was documented that Federal reserve communication announcements affect financial markets significantly moreover, it was shown that different financial assets react to different factors of monetary policy surprises. For example, the exchange rates and ten-year interest rates respond mainly to the path surprise while stock prices and short-term interest rates respond mainly to the target surprise. Furthermore, to discuss whether the response of financial asset prices to monetary policy surprises varies in different times in terms of monetary policy implications in the US, this study compared the estimates of the pass-through of monetary policy shocks on financial assets before and after QE and further, considered the asset price reactions in recession and non-recession times with high-frequency data. It was shown that the effects of these monetary policy surprises have a different pattern in different times. All the financial markets’ responses (except equity index) to the target surprise were insignificant after QE whereas all exchange rates’ reactions to the path factor after QE are significant and also the magnitude of these responses have increased. Therefore, these findings supported two arguments which suggest the effects of US dollar on international exchange rates has become more influential after the Fed’s unconventional monetary policy and to adequately capture the effects of monetary policy on financial markets, at least two factors are needed. Conversely, even though the volatility of financial asset prices during the recession times is higher than the non-recession times, it was shown that in recession times there was no significant effects of the target and path policy surprises on the financial markets. It was interpreted that in recession times the Fed becomes more transparent or the markets predict the Fed’s actions well. Another striking aspect of this finding is that the volatility of financial asset prices during the recession times was higher than the non-recession times thus, it was assumed that the sources of this volatility are not the Fed policies but other news. Therefore, here again, it was suggested that using daily or wider windows during the recession time will cause a mis-identification problem.

University of Nottingham, School of Economics.