October 25, 2024, Filed Under: Working PaperMonetary Policy without Moving Interest Rates: The Fed Non-Yield Shock EMPCT Working Paper Series No. 2024-0579 pages | PDF Download | PDF in Browser Citation:Boehm, Christoph E, and T. Niklas Kroner, “Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock” September, 2024 Christoph E. BoehmUT Austin and NBER T. Niklas KronerFederal Reserve Board AbstractExisting high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks.
