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First Quarter 2014, 
Vol. 96, No. 1
Posted 2014-03-13

The Evolution of Federal Reserve Policy and the Impact of Monetary Policy Surprises on Asset Prices

by Brett W. Fawley and Christopher J. Neely

This article describes the joint evolution of Federal Reserve policy and the study of the impact of monetary policy surprises on high-frequency asset prices. Since the 1970s, the Federal Open Market Committee has clarified its objectives and modified its procedures to become more transparent and predictable. Researchers have had to account for these changes to procedures and perceived objectives in developing methods to study the effects of monetary surprises. Unexpected changes to the Committee’s federal funds target and postmeeting statements strongly and consistently affect asset prices, including interest rates, exchange rates, and (for target changes) stock prices. The study of monetary surprises on asset prices provides important insight for policymakers, financial market participants, and economic models.