What Explains the Stock Market's Reaction to Federal Reserve Policy?
This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives both of measuring the average reaction of the stock market and also of understanding the economic sources of that reaction. We find that, on average, a hypothetical unanticipated 25-basis-point cut in the federal funds rate target is associated with about a one percent increase in broad stock indexes. Adapting a methodology due to Campbell (1991) and Campbell and Ammer (1993), we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.
Published Versions
Bernanke, Ben S., and Kenneth N. Kuttner. "What Explains the Stock Market's Reaction to Federal Reserve Policy?" Journal of Finance 60(3): 1221-1257, June 2005 citation courtesy of 
Ben Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. citation courtesy of
Bernanke, Ben S., and Kenneth N. Kuttner. "What Explains the Stock Market's Reaction to Federal Reserve Policy?" FEDS Working Paper 2004-16, Board of Governors of the Federal Reserve System
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