What explains the stock market’s reaction to federal reserve policy?
Open accessAbstract
This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives of both measuring the average reaction of the stock market and understanding the economic sources of that reaction. We find that, on average, a hypothetical unanticipated 25‐basis‐point cut in the Federal funds rate target is associated with about a 1% increase in broad stock indexes. Adapting a methodology due to Campbell and Ammer, we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.
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Stock market valuation increases in response to an interest rate cut.
“Bernanke and Kuttner (2005) which documents how stock market valuation increases in response to an interest rate cut.”
From Threats to central bank independence: High-frequency identification with twitter (2023) · cites this paper as Bernanke and Kuttner (2005)
The estimated stock market effects are about four times smaller than estimates in Bernanke and Kuttner (2005) and Swanson (2021).
“In terms of economic magnitudes, the estimated effects are about four times smaller than the estimates in Bernanke and Kuttner (2005) and Swanson (2021).”
From Threats to central bank independence: High-frequency identification with twitter (2023) · cites this paper as Bernanke and Kuttner (2005)
Surprise interest rate cuts increase stock market valuations.
“The positive response of the stock market to an interest rate cut is consistent with the evidence from Bernanke and Kuttner (2005) who find that surprise interest rate cuts increase stock market valuations.”
From Threats to central bank independence: High-frequency identification with twitter (2023) · cites this paper as Bernanke and Kuttner (2005)
Cites
By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior
Campbell, J. Y., & Cochrane, J. H. (1999) · Journal of Political Economy · doi:10.1086/250059 · Cited by 5,210 · see citing works
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Threats to central bank independence: High-frequency identification with twitter
Bianchi, F., Gómez-Cram, R., Kind, T., & Kung, H. (2023) · Journal of Monetary Economics · doi:10.1016/j.jmoneco.2023.01.001 · Cited by 89 · see citing works
Karau, S. (2023) · Journal of International Money and Finance · doi:10.1016/j.jimonfin.2023.102880 · Cited by 70 · see citing works
Monetary policy shocks and Bitcoin prices
Ma, C., Tian, Y., Hsiao, S., & Deng, L. (2022) · Research in International Business and Finance · doi:10.1016/j.ribaf.2022.101711 · Cited by 34 · see citing works
House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data
Gorea, D., Kryvtsov, O., & Kudlyak, M. (2022) · doi:10.2139/ssrn.4188292 · Cited by 15 · see citing works
Does U.S. monetary policy sway global crypto investment demand?
Hodula, M. (2025) · Finance Research Letters · doi:10.1016/j.frl.2025.107408 · Cited by 7 · see citing works
- Authors
- BERNANKE, B. S., & KUTTNER, K. N.
- Affiliations
- Princeton University (US)
- ORCID
- KUTTNER, KENNETH N.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2005-05-03
- Volume
- 60
- Issue
- 3
- Pages
- 1221-1257
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2165100677
- Cited by
- 2,384
- References
- 1
- Citations by year
- 2026: 141 · 2025: 196 · 2024: 167 · 2023: 146 · 2022: 149 · 2021: 146 · 2020: 137 · 2019: 121 · 2018: 114 · 2017: 123 · 2016: 120 · 2015: 104 · 2014: 117 · 2013: 122 · 2012: 106
- FWCI
- 83.54
- Type
- journal article
- Language
- en
- Open access
- bronze
- doi.org
- Locations
- The Journal of Finance (publishedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Market Dynamics and Volatility
- Keywords
- Federal Reserve policy, monetary policy, stock market reaction, stock prices, federal funds rate, expected excess returns, stock index returns
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