The Economics of the Fed Put

Anna Cieslak, Annette Vissing-Jorgensen

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    Abstract

    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.
    Original languageEnglish
    JournalThe Review of Financial Studies
    Number of pages45
    ISSN0893-9454
    DOIs
    Publication statusPublished - 3 Oct 2020

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