Conference Agenda

Abstract: A significant fraction of measured surprise central bank interest rate hikes

is associated with simultaneous stock market run-ups and upward revisions in economic

growth forecasts. This evidence is often interpreted as contradicting the standard New Keynesian transmission mechanism and as indicating that the Fed possesses superior information

about economic fundamentals. We present a New Keynesian model in which investors are

uncertain about the Fed’s long-run monetary policy objectives and learn from observed Fed

actions. Our model does not assume that the Fed has superior information, but it nonetheless generates a “Fed information effect,” that is, a positive co-movement between interest

rate surprises, revisions in expected growth, and stock returns as an equilibrium outcome.

We show that the key predictions of our model are consistent with empirical evidence on

asset market responses to measured Fed information shocks.