DOES THE FEDERAL-RESERVE AFFECT ASSET PRICES

The Federal Reserve is probably one of the institutions' most closely monitored by investors. This indicates that investors believe the acti ons of the Fed have implications for asset prices. To this date, the t rading activities of the Fed in the financial markets have not been ex amined to see how the Fed influences asset prices. Using daily data on open market operations (OMOs) and asset prices, this study fills this void. One finding of the paper is that OMOs Granger-cause both short- and long-term interest rates. Furthermore, the sign of the relationsh ip confirms the existence of the liquidity effect. Given that its trad es represent a small portion of the market volume, how the Fed influen ces bond prices is a puzzle. The only reasonable explanation is that t he Fed's trades have high information content. Judging by the impulse response paths, the reaction of interest rates to open market operatio ns is fast. Additionally, it appears that monetary policy has a lastin g impact on interest rates.