Cyclical Variation in the Effect of Federal Funds Target Rate Surprises on Hospitality Index Returns

Abstract

This paper examines the effect of US Federal Reserve monetary policy action announcements on hospitality index returns (HIRs) and provides evidence of cyclical variation in the impact of federal funds target rate surprises on US HIRs. To obtain a correct identification of monetary policy changes, the paper follows Kuttner in separating the surprise element from the expected element of the target rate changes. The surprise element is expected to have a strong influence on HIRs because the surprise component is not yet priced in the market. Test results show that funds target rate surprises can have a significant impact on airline, gambling, hotel and travel and leisure index returns, but actual funds target rate changes and the expected component have no strong impact on HIRs. Moreover, the significant influence of funds target rate surprises on HIRs depends on business conditions and is much greater in size and statistical significance in business contraction. In particular, the significant effects of federal funds target rate surprises on airline, hotel and restaurant index returns are found to exist only during periods of business cycle contraction.

Keywords

federal funds rate federal funds target rate surprises hospitality index returns business conditions

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