Anna and Annette on the Fed PUT

Anna Cieslak and Annette Vissing-Jorgensen had written another terrific paper – this time on the Fed PUT.

The highlights of the paper are as follows:

(1) Reaction of actual economic output (GDP growth) to excess stock market returns is small and is symmetric for stock market gains and losses.

(2) Reaction of unemployment to excess stock market returns is asymmetric. That is, unemployment rises more when stock market records losses than it falls when the stock market posts gains. But, the Federal Reserve expectations for unemployment change much more than actual unemployment changes themselves!

(3) Sensitivity of actual private consumption to negative stock market outcomes is small, especially in the 1994-2016 period. But, the focus of the Federal Reserve on the stock market is driven a lot by its concern over stock market declines on consumption.

(4) Before 1994, going back to September 1982, there is no significant relationship between the stock market and updates to Fed growth expectations.

(5) The Fed updates its macroeconomic expectations (about growth and unemployment)
in a way that is highly sensitive to stock market outcomes during the inter-meeting period. This relationship is pervasive starting from the mid-1990s, but is largely absent before that.

This paper and their earlier paper, ‘Stock returns over the FOMC cycle’ (with a third author) could very well be the harbingers of the long overdue reform of the monetary policy framework of the Federal Reserve or that of the reform of the Federal Reserve itself.

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