Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Monetary Policy and the Stock Market: Time-Series Evidence

November 2016
Michael Weber, Andreas Neuhierl

We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.