Across the Pond: Effects of Surprises in Federal Reserve Monetary Policy on European Equity Returns in Conventional and Unconventional Regimes

This paper examines how US monetary policy surprises transmit to European equity markets, and whether the transmission mechanism differs between conventional and unconventional policy regimes. We use 219 Federal Open Market Committee announcements between March 2000 and December 2025 and daily returns from five major Western European stock indices. These include the DAX, FTSE 100, CAC 40, FTSE MIB, and IBEX 35. We subsequently decompose monetary surprises into target and path components and estimate their respective effects on European index returns using OLS regressions conditioning on year and stock index fixed effects. Two main findings emerge. First, our results suggest the forward guidance dimension of US monetary policy is the operative channel of transatlantic equity spillovers. Surprise revisions to the current federal funds rate target have no significant effect on European index returns. However, a 25-basis point upwards revision to the expected future path of US interest rates significantly lowers European equity returns by approximately 17 basis points. A higher path surprise means US rates remain elevated for longer than expected. This raises global corporate discount rates and tightens financing conditions, lowering equity valuations. Second, a 25-basis point path surprise reduces European index returns by 38.5 basis points when the Federal Reserve is operating at or near the zero lower bound. The effect approximately doubles relative to conventional regimes due to heightened market sensitivity to forward guidance when conventional rate-setting is constrained and communication about future policy becomes the primary instrument.