Discussion Paper Details

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Title: The Economics of the Fed Put

Author(s): Anna Cieslak and Annette Vissing-Jørgensen

Publication Date: April 2020

Keyword(s): Fed put, monetary policy, Stock market, Taylor rules and textual analysis

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Cieslak, A and Vissing-Jørgensen, A. 2020. 'The Economics of the Fed Put'. London, Centre for Economic Policy Research.