Has the Effect of Monetary Policy Announcements on Asset Prices Changed

The Federal Reserve has relied increasingly on communication to implement monetary policy. In addition to setting an in-termeeting target for the federal funds rate, the Federal Open Market Committee (FOMC)—the Federal Reserve’s principal policy-making body—conveys information about the likely future path of the federal funds rate. As the target funds rate reached its effective lower bound during the recent financial crisis—limiting its usefulness as a policy tool—the FOMC began to increase its use of forward guidance about the likely path of the federal funds rate. The greater use of forward guidance as a policy tool has focused at-tention on its effectiveness in influencing the real economy. A key gauge of the usefulness of policy guidance is the response of asset prices, the channel through which monetary policy is transmitted to the real econ-omy. Changes in policy guidance affect the private sector’s expectations about the future path of the federal funds rate, and those expectations in turn affect bond yields, stock prices, and other asset values. Changes in asset values influence real activity through their effects on spending by consumers and businesses. Researchers have found that communication Taeyoung Doh is a senior economist with the Federal Reserve Bank of Kansas City. Michael Connolly is an assistant economist with the bank. This article is on the bank’s website at www.KansasCityFed.org.