IFin Seminar, Anna Cieslak, Duke University - "Tough Talk: The Fed and the Risk Premia"

Institute of Finance

Date: 12.10.2023 / 14:30 - 15:40

Speaker: Anna Cieslak, Duke University

Title - "Tough Talk: The Fed and the Risk Premia"

Date: October 12, 2023

Time: 14:30 - 15:40

Room: Virtual on Zoom




We study how the Fed's communication of its forward-looking policy stance affects risk premia in financial markets. We analyze private deliberations of the Federal Open Market Committee (FOMC) to elicit policy stance beyond the current announcement. We show that more hawkish (dovish) policymakers' views expressed in the FOMC meeting predict economically significant reductions (increases) in risk premia during the subsequent intermeeting period. The risk premium reaction unfolds gradually in the days after the FOMC announcement. The effect is not subsumed by the content of the FOMC statements and is distinct from the “on impact” risk-premium reduction caused by surprise rate cuts at the FOMC announcements, documented in the literature. To understand the predictive power of the Fed's private deliberations, we trace out how the stance emerging from the meeting is revealed to the public via speeches and minutes, and tie the movements in risk premia to the granular communication events over the intermeeting period. The results underscore the role of communication in managing public risk perceptions.