The Economics of the Fed Put

Anna Cieslak, Annette Vissing-Jorgensen*

*Corresponding author for this work

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    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
    Issue number9
    Pages (from-to)4045-4089
    Number of pages45
    Publication statusPublished - Sep 2021

    Bibliographical note

    Published online: 03 October 2020.

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