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Volume V, 2006

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The purpose of this paper is to investigate how equities of nine individual economic sectors are affected when monetary policy announcements in the form of federal funds rate changes are made over the period January 1, 1999 to May 11, 2005. This sector-analysis is conducted over a recent time period, when the Federal Open Market Committee has adopted a policy of immediate disclosure of its federal funds target rate changes. Our results indicate that the Consumer Discretionary and Technology sectors’ equity returns are negatively and significantly related to changes in the federal funds target rate. This negative relationship appears to be especially pronounced for decreases in the federal funds target rate. A positive and significant relationship exists between equity returns in the Consumer Staples Sector and federal funds target rate changes, which is again concentrated in federal funds target rate decreases. A surprising finding is that Utility Sector returns tend to decrease in response to decreases in the federal funds target rate. In summary, we find that the relationship between equity returns and federal funds target rate changes documented in previous studies is more pronounced for some sectors in the economy.

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