Aggregate Earnings Surprises, Monetary Policy, and Stock Returns

• In Event: Macroeconomic Effects and Financial Reporting

Abstract

This paper examines whether aggregate earnings is useful in predicting the Fed’s future monetary policy stance. We find that the Fed tends to adopt tight (loose) monetary policy by increasing (decreasing) the federal funds rate following positive (negative) aggregate earnings growth. This relation holds after controlling for contemporaneous macroeconomic news about inflation, unemployment, and real GDP growth, suggesting that aggregate earnings serves as a leading indicator for the Fed’s monetary policy stance. We further show that the link between aggregate earnings and future monetary policy changes can help explain the previously documented negative association between aggregate earnings and stock returns.

Authors

• Lindsey A Gallo, University of Maryland, College Park

• Rebecca Hann, University of Maryland, College Park

• Congcong Li, University of Maryland, College Park