Market Set-Up in Advance of Federal Reserve Policy Rate Decisions
Economic Journal, 126, 2016
56 Pages Posted: 17 Dec 2013 Last revised: 17 Dec 2016
Date Written: January 27, 2016
This paper considers the uncertainty associated with upcoming Federal Open Market Committee (FOMC) announcements and the extent to which participants in the fed funds futures market prepare for such announcements before they actually occur. We demonstrate that markets set up well in advance of known announcement days, going back as far as six months prior to an FOMC meeting. As a result, there is often less variation in fed funds futures prices in the period immediately preceding an FOMC announcement, despite greater trading activity, as the market has already incorporated anticipated signals. We find that macro announcements and central bank officials' congressional testimony are of comparable importance, whereas speeches are relatively unimportant. In addition, macro announcements have stronger effects when they are released during the Fed's "blackout" period, and some forms of congressional testimony are only important when they coincide with days when important macro variables are released, emphasizing important interaction effects.
Keywords: FOMC, announcements, federal funds rate, anticipatory signals
JEL Classification: E43, E44, E58, G18
Suggested Citation: Suggested Citation