Reactions to Monetary Policy Announcements

📢 New Data & Paper 📢  We've just released the 𝐔.𝐒. 𝐌𝐨𝐧𝐞𝐭𝐚𝐫𝐲 𝐏𝐨𝐥𝐢𝐜𝐲 𝐄𝐯𝐞𝐧𝐭-𝐒𝐭𝐮𝐝𝐲 𝐃𝐚𝐭𝐚𝐛𝐚𝐬𝐞 (USMPD), a public, transparent, and regularly updated dataset on FOMC communication. It contains financial market reactions to all official FOMC communication events since 1994, including statements, post-meeting press conferences and minutes releases, as well as data and code for high-frequency monetary policy surprises. We hope this will be useful to many researchers working on market impact, policy communication and monetary transmission. 🔗Database: http://sffed.us/USMPD In our working paper "Financial Market Effects of FOMC Communication: Evidence from a New Event-Study Database" we describe the USMPD in detail and document new empirical results, such as: - Large monetary policy surprises have made a comeback and press conferences play a particularly important role. - Monetary policy has significant effects on market-based inflation and dividend expectations that are consistent with conventional channels of monetary transmission. - Term structure responses peak at longer horizons, suggesting that policy news conveys signals about the Fed's reaction function. 🔗 Paper: https://lnkd.in/gy2P6Vra Thanks to my excellent coauthors Miguel Acosta, Andrea Ajello, PhD, Francesca Loria, and Silvia Miranda-Agrippino! This research is part of the Center for Monetary Research at the Federal Reserve Bank of San Francisco. 🔗 https://sffed.us/CMR

The Fed lowered Fed Funds today by 50 bps to 5.0%. 11 of the 12 Fed governors backed the idea. They also shared their quarterly projections, targeting another 25 bps cut in November and 25 bps in December. So, if that holds, by year-end, we will have a 4.5% Fed Funds. For perspective, cutting rates usually is done to provide some financial relief in a struggling economic environment. The S&P 500 hit another record high on the news. The Fed policy statement said: "The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance." The 10y UST was at 3.64% on the news, up slightly from a 52-week low earlier this week. When the long end drops it can be a bearish signal as people are buying more bonds as a safety investment, pushing down rates. So you have the bond market signaling recession while the stock market is signaling that all is well. What a moment. I must admit I have a hard time reading the tea leaves on this one. Why did they cut 50 and not 25? Perhaps they know something I don't (and go ahead, make a joke, I'm an easy target!). Perhaps they are worried about the interest payments being the 2nd biggest line item in the Federal budget. But seriously, a 50 bps cut feels to me like a crisis cut. This is a policy change moment, to be sure. We all knew it was coming because Powell telegraphed it for months, especially at Jackson Hole. But the economy is doing very well, and top-line macro indicators look good. It is two months before a major presidential election where the incumbent is out of the race. To the point about inflation being subdued, I would be remiss if I didn't point out that housing prices are up 6.7% YoY as of August, which, granted, is lower than previous prints, but is still well elevated. Housing prices are the biggest component of the Core CPI. We are all living with the consequences of astronomical increases in housing prices. Perhaps the Fed thinks that by lowering Fed Funds this much, it could jump-start supply in the housing market, bringing people off the sidelines to sell, and to buy, potentially lowering prices as an equilibrium is found. I don't know. With this move we should expect to see a mini-boom for gold prices. Gold started the year at $2000, and now it's $2600 an ounce - a 30% increase YTD. The "barbarous relic" has for thousands of years been a safe-haven investment. Could be a driver of its bid. I'll have more to say about this move in the coming days. Need to think about it. But I am surprised they cut 50 and not 25. #fedpolicy #riskmanagement #interestrates

The Reserve Bank of India’s bold move to slash the repo rate by 50 basis points to 5.5%—its third consecutive cut this year—signals an aggressive pivot toward growth stimulation amid easing inflationary pressures. With food inflation softening and core inflation expected to remain benign, the RBI seized the opportunity to front-load monetary easing. The change in policy stance from “accommodative” to “neutral” reflects a recalibrated strategy: while liquidity support continues, the RBI is preparing to remain flexible should inflationary threats re-emerge. The simultaneous reduction in the Cash Reserve Ratio, expected to release ₹2.5 lakh crore into the system, reinforces the central bank’s intent to amplify credit flow and investment activity across sectors. This decision has wide-reaching consequences. Borrowers, especially in the housing and auto sectors, will see substantial relief through reduced EMIs—potentially saving thousands monthly—spurring consumer sentiment and retail spending. On the flip side, fixed deposit investors are already feeling the pinch of falling returns, a trade-off the RBI seems willing to make for broader economic revival. Stock markets have cheered the move, with the Nifty and Sensex posting gains as financials and real estate stocks surged. The message from RBI is clear: with inflation under control and global headwinds persisting, India is choosing to bet on domestic demand, and this rate cut is a calculated push to accelerate the country’s growth engine while keeping inflation in check. #LinkedinNews #Finance #RBI #SanjayMalhotra #MPC #RepoRate

How does monetary policy shape who gets a mortgage? 🏠💶 I’m excited to share my new working paper published by the National Bank of Belgium, co-authored with Salima OUERK. We study how ECB monetary policy surprises affect new mortgage lending across the household income distribution in France, using loan-level data from the national credit registry. We uncover a striking U-shaped pattern: ➡️ Middle-income households, especially first-time buyers, react the most to changes in financing conditions. These households, while creditworthy, remain liquidity constrained and therefore more sensitive to both monetary policy and macroeconomic signals. Our results highlight the expectations channel and the information channel: - Expansionary pure policy and forward guidance surprises boost credit demand. - Positive macroeconomic signals also raise borrowing. A one-standard-deviation expansionary surprise over two years leads to a 10% increase in new mortgage lending among middle-income households. 🔗 Read the full paper here: https://lnkd.in/eDSNiYYA

What the Bank of England’s Rate Cut Tells Us About the UK Economy The Bank of England’s decision to cut the base rate to 4% its lowest level in over two years marks a significant moment for UK monetary policy. Coming after a historic two-round vote among Monetary Policy Committee (MPC) members, the move reflects the growing complexity of balancing inflationary pressures with clear signs of economic weakness. This was the fifth 25 basis point cut in the past 12 months, and the first time since the MPC was formed in 1998 that two rounds of voting were required. The result underscores a key point: policymakers are facing an unusually challenging macro economic environment. Inflation remains above the 2% target, having reached 3.6% in June and projected to rise to 4% by September. Yet the economy is showing signs of softness, with GDP contracting in April and May, unemployment rising to a four-year high of 4.7%, and payroll employment falling for five consecutive months. In explaining the decision, Governor Andrew Bailey described it as “finely balanced” and reiterated that any future rate changes would need to be made “gradually and carefully.” The Bank is aiming to support demand without undermining hard-won progress on inflation. There are good reasons for caution. Inflationary pressures are being driven not just by headline energy and food costs, but also by structural factors such as April’s National Insurance contribution (NICs) changes and the increase in the minimum wage. These are feeding into wage expectations and service-sector pricing, complicating the task of disinflation. For households and businesses, particularly those with variable-rate debt or planning new borrowing, the cut may offer some relief. After two years of rising rates, even small adjustments can impact sentiment and affordability. However, the benefits may be tempered by other factors such as ongoing fiscal pressures, higher input costs, and global uncertainty. The Bank itself noted that upcoming US trade tariffs could slightly dampen UK GDP over the medium term, even as they potentially lower import prices from re-routed trade flows. Labour market developments will remain key. While a softer labour market helps ease inflation risks, it also points to slower income growth and potentially reduced consumer demand. The Bank now forecasts unemployment to peak at 4.9%, reflecting ongoing challenges in the hiring landscape. The Bank was careful to stress that monetary policy is not on a "pre-set path." While markets anticipate further rate reductions by mid-2026, the trajectory will depend heavily on how inflation and growth evolve over the coming quarters. In short, the Bank’s decision signals a recalibration, not a pivot. Source: Bank of England Monetary Policy Summary August 2025 #BankOfEngland #InterestRates #UKEconomy #MonetaryPolicy #Inflation #SMEs #InvestmentOutlook #MacroEconomics #FSMA #BusinessFinance #EconomicOutlook #PolicyAnalysis #UKFinance #LinkedinNews

We asked 25,000 Americans what they think happens when the Fed raises rates. Two-thirds said inflation goes up. In a new paper with Francesco Grigoli, Damiano Sandri, and Yuriy Gorodnichenko, we use randomized information experiments to trace how households' beliefs about monetary policy translate into their own spending and portfolio decisions. In households' minds, tighter policy still reduces consumption. But not through real interest rates or income, which is what most models assume. It works because households expect rate hikes to raise their cost of living, and they pull back spending to build a buffer. As the figure below shows, this expected inflation channel is bigger than borrowing rates, savings rates, wages, and unemployment combined. This is a partial-equilibrium story about how households perceive monetary policy and respond accordingly, not the full GE effect. But the striking finding is that inflation expectations appear to be a key driver of how households respond to monetary policy changes. Post on Empirical Macroeconomics Policy Center of Texas (EMPCT) is here: https://lnkd.in/eZp3ey4j

New #VoxEU column about our recent paper on the household-level transmission of monetary policy: https://lnkd.in/eApcYznk Using a survey of more than 25,000 U.S. households, we study how households perceive monetary policy and how these perceptions shape their spending (and portfolio) decisions. One key finding: while households expect higher interest rates to reduce consumption, the mechanism differs markedly from standard macroeconomic models. Many households interpret monetary tightening as inflationary, and they respond to higher #expectedinflation by reducing #consumption, highlighting the central role of beliefs and communication in monetary policy transmission (with Olivier Coibion, Yuriy Gorodnichenko, and Damiano Sandri).

The RBI and Government today delivered a coordinated package aimed at strengthening capital inflows and easing pressure on the rupee. Importantly, the MPC chose not to use interest rates as a currency defence tool, keeping both the policy rate and stance unchanged. The measures combine near-term flow support with longer-term structural reforms and could help bridge a significant part of the external financing gap we estimate for FY27. Key takeaways: • Rupee: Near-term appreciation bias as capital inflows materialise, though gains could be capped by global uncertainty and the RBI’s large forward book. • Rates: RBI remains on pause for now, but higher inflation projections keep the possibility of rate hikes later in FY27 alive. • Growth: Growth forecasts have been revised lower, with risks skewed to the downside if oil prices remain elevated. • Liquidity & Bonds: Liquidity should remain comfortable in the near term, while bond yields are likely to stay range-bound before facing upward pressure later in the year. Overall, the policy response strengthens India’s external position while avoiding a premature tightening of domestic financial conditions.

The #FederalReserve kicked off its much anticipated series of interest-rate cuts with a 50-basis point (or half a percentage point) reduction. It was a close call -- plenty of economists thought policymakers would only go for a quarter point, but an 11-1 vote won out in an aggressive start to a policy shift aimed at bolstering the US labor market. Here are some key takeaways from the Fed's first rate cut in more than four years: -- Governor Michelle Bowman votes against decision in favor of a smaller, quarter-point cut, the first such dissent since June 2022 and the first time a Fed governor has dissented since September 2005 -- “Dot plot” of rate projections shows the median official expected to lower rates by a percentage point by year-end, implying two more quarter-point cuts or one larger, half-point cut -- Median rate forecast for 2025 falls to 3.4% from 4.1% in June, implying four additional quarter-point moves next year -- Statement adds language to say the committee is “strongly committed to supporting maximum employment” in addition to returning inflation to its 2% goal -- The S&P 500 index rose while Treasury yields and the Bloomberg Dollar Index fell. Spot gold climbed to a record. Read our full story here from Bloomberg News:

A quick summary of our thoughts on the Fed decision. Key comments from Fed Chair Jay Powell: ➡ The Fed has “gained greater confidence that inflation is moving sustainably back to 2 percent.” ➡ They are “strongly committed to supporting maximum employment.”   The key point: Inflation risks are skewed to the downside. Unemployment risks are skewed to the upside. And the balance of risks has completely flipped.   Other observations: ➡ The Fed is cutting because inflation is returning to target, not because labor markets and growth are falling out of bed. ➡ This does not make up for not cutting 25bps in July. Rather, it was a function of how much real rates have tightened. Even after cutting 50 bps, policy remains well into restrictive territory. ➡ This sends a powerful signal of commitment that the Fed will not tolerate falling behind the curve and letting the labor market weaken further. ➡ The Fed is effectively trimming the left tail risk on growth at a time when recession risks had begun creeping higher.    The big picture takeaway: In the words of Powell himself: “The time to support the labor market is when it is strong.”  ➡ And that is now.  ➡ Stabilize labor market conditions at healthy levels and prevent recessionary dynamics from taking hold. ➡ The first cut of the recalibration cycle is about defending maximum employment. There will be more if and when they’re needed. ➡ The Powell Put is in play for labor markets and that’s good for markets and the economy.   The market’s reaction? Look at sector performance in the S&P 500® since 9/11/24. (Why 9/11? That’s when the futures market began to aggressively increase odds for a 50bps cut.) Cyclicals and Growth outperformed the broad market. We’ll label that as ‘things not bearish.’ The Powell Put is in play and the strike price is moving higher. Once we get through the historically weak pre-election seasonals, this could set up well for a ramp into year-end.