Can the Fed Talk the Hind Legs Off the Stock Market?

This paper analyzes the impact of US central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. In our sample of S&P 500 companies we find that the stock prices of firms with low cash ows, low returns to assets or equity, very high or low debt levels, small size or using more trade credit to be affected more by central bank communication. Our evidence suggests that central bank communication by the FOMC has an impact on stocks and provides additional evidence for the demand and the credit channel