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- Title
The Economics of the Fed Put.
- Authors
Cieslak, Anna; Vissing-Jorgensen, Annette
- 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.
- Subjects
RATE of return on stocks; RATIONAL expectations (Economic theory); STOCK exchanges; UNITED States. Federal Open Market Committee; CONSUMPTION (Economics); WEALTH effect (Economics)
- Publication
Review of Financial Studies, 2021, Vol 34, Issue 9, p4045
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhaa116