The impact of monetary policy on stock prices: gaining momentum or losing steam?

Abstract This paper examines the impact of the Federal Reserve’s conventional and unconventional monetary policy on US stock prices using an event study with high-frequency data. Three indicators of monetary news are constructed to separately identify surprise changes in the current federal funds rate, forward guidance, and large-scale asset purchases (LSAPs). Estimation results show that all three types of monetary surprises have economically important and statistically significant effects on US stock prices. A modified version of Swanson’s (J Monet Econ 118:32–53, 2021) LSAP measure—which imposes a zero surprise constraint in the pre-LSAP period—confirms the significant effects of LSAP announcements. These findings differ from those of Swanson (2021), who reports statistically insignificant effects, and suggest that the modified LSAP measure may capture monetary surprises more precisely. The responses of stock prices to Target and Path surprises are persistent, while unanticipated LSAP announcements have only transitory effects. Although conventional policy was constrained by the zero-lower bound during the financial crisis and COVID-19, monetary policy remained effective. The financial market impact of monetary policy across US stock indexes is heterogeneous, with the effects of forward guidance and asset purchases weaker for growth and small-cap indexes than for large-cap stocks.