The report "Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock" by Christoph E. Boehm and T. Niklas Kroner discusses the surprising low explanatory power of high-frequency monetary policy shocks on stock prices and exchange rates, despite these being key elements in understanding monetary policy transmission. The authors propose a new method to estimate a "Fed non-yield shock," which is orthogonal to yield changes and can be identified from excess volatility in the S&P 500 and various dollar exchange rates.
Key points:
-
Explanatory Power of Shocks: Existing high-frequency shocks explain less than 30% of the variation in stock prices and exchange rates around Federal Open Market Committee (FOMC) announcements. This includes single and multi-shock models.
-
Fed Non-Yield Shock: This shock is estimated using a heteroskedasticity-based procedure, focusing on the excess volatility in the S&P 500 and dollar exchange rates. It raises stock prices in the US and globally, and depreciates the dollar against all major currencies.
-
Independence from Previous Shocks: The non-yield shock is essentially uncorrelated with previous monetary policy shocks and has significant effects compared to them.
-
Risk Premium Channel: The strong impact of the non-yield shock on the VIX and other risk-related measures suggests a dominant role in influencing risk premiums.
-
Linkage to Fed Communications: The existence of the non-yield shock is shown to relate to Fed communications, indicating its importance in understanding monetary policy impacts.
-
Implications for Structural Analysis: The non-yield shock has implications for identifying structural monetary policy shocks, suggesting a need for further research into the channels through which monetary policy affects asset prices beyond traditional yield curve changes.
The report contributes to the understanding of how monetary policy impacts financial markets by highlighting the importance of factors beyond direct interest rate changes and emphasizing the role of communication and information effects in shaping market responses.
