The FOMC risk shift

This paper presents new evidence on channels through which monetary policy affects prices in equity and other asset markets. A large part of U.S. equity price moves around FOMC meetings can be attributed to shocks that are uncorrelated with yield changes but closely linked to changes in investors' risk appetite. These price effects are mirrored by investors' portfolio rebalancing decisions, manifesting themselves via sizeable shifts in fund flows between bonds and equities. All these effects are transitory and largely reversed after about one month. We find evidence that risk appetite shocks are related to changes in uncertainty triggered by FOMC meetings.