Put A Stock In It: Analyzing the Impact of FOMC Announcements on the Equity Market In Various Environments

Abstract

After the massive stock market fluctuations of the Great Recession and the Federal Open Market Committee (FOMC) announcing the unprecedented lowering of the Federal Funds Rate (FFR) to effectively 0%, debates raged about the implications of monetary policy and its impact on financial markets. This paper addresses questions concerning the effect of changing the target FFR on the United States’ equity market and regarding what factors might significantly alter this effect. We differentiate our study with a unique dataset and the examination of specific subsets of data. Focusing on the 18.5 years from January 1995 through June 2013, this study analyzes the effect of announced changes to the target FFR on intraday data for returns on the Standard & Poor’s 500. We eventually scrutinize specific subsets of the data to look for how components of the economic environment (e.g. the acting FOMC chair) might alter this effect. A significant relationship was observed, as an announcement of a decrease in the target FFR of 25 basis points resulted in about a 22 basis point rise in the broad return of the United States stock market within fifteen minutes. Additionally, FFR changes made outside of regularly scheduled meetings led to larger changes in the equity market. Our results suggest further research should be done to investigate the following: potential differences in reaction during different FOMC Chairmanships, the impact of announcements after the zero-bound is reached, common responses to policy news in various economic environments (e.g. different recessions), and possible disparities in reactions to positive versus negative news.