We study the response of stock prices to monetary policy, distinguishing effects of exogenous shocks from “Delphic” shocks that reveal the Federal Reserve’s macroeconomic forecasts. To decompose monetary policy surprises into these separate components we construct a measure of Federal Reserve private information that exploits differences in central bank and market forecasts. Contractionary policy shocks of either type lower stock prices with exogenous shocks having a larger negative effect. There is some suggestive evidence of an asymmetry; when FOMC meetings are unscheduled or when the fed funds rate reverses direction, stock prices rise in response to a contractionary Delphic shock.

We show that firms that face higher uncertainty adjust their investment less in response to monetary policy shocks. We find corroborating evidence of this differential effect from firm-level stock returns on FOMC announcement days. Our results are consistent with a real options (or wait-and-see) channel whereby higher uncertainty dampens the response to changes in business conditions. Consistent with this mechanism, the dampening effect is stronger for firms that face higher reversibility.