The time varying effect of monetary policy on stock returns

- Stock returns respond strongly to monetary policy surprises during the 2000s.
- Stock returns do not respond to monetary policy surprises during the 1990s.
- Bond markets do not demonstrate such time variation.
- Monetary policy's time varying effect is driven by events in the stock market.

We find that a surprise increase on the federal funds rate has five times stronger and statistically significant effects on stock returns during 2000-2007, versus statistically insignificant effects during 1989-2000. These differences are not apparent in the bond markets.