Federal reserve policy and information flow

Outlines previous research on the impact of US Federal Reserve policies on market interest rates and returns; and the relationship between interest rates and market returns. Investigates these effects over three time periods: Sept 1974‐Oct 1979 (interest rate targeting through the federal funds rate), Oct 1979‐Aug 1987 (reserves targeting using the discount rate) and Aug 1987‐Jan 1996 (interest rate targeting again); using four mathematical models. Discusses the results, which suggest that changes in the relevant federal policy tool have a significant negative effect on equity returns, especially during the first two periods and when the change reverses previous change. Concludes that announcements of changes in policy contain valuable information not already included in share prices.