Daily Monetary Policy Shocks and the Delayed Response of New Home Sales∗

This paper argues that a change in the fed funds target begins to affect the economy as soon as it becomes anticipated by markets, with innovations in mortgage rates driven in part by innovations in the level and slope of the term structure of expected near-horizon fed funds rates. Despite this instantaneous anticipatory response of mortgage rates, the consequences for housing of a change in monetary policy are drawn out over a long period of time due to heterogeneity across households in time required to purchase a home. This framework facilitates detailed measurement and interpretation of the time lags relating monetary policy to the housing market, and motivates a daily index that can be used to summarize the current and future economic implications of recent Fed policy changes. ∗I am grateful to Marjorie Flavin, Seth Pruitt, and Eric Swanson for helpful comments on an earlier draft of this paper.