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

See all articles by Dick J. C. van Dijk

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Robin L. Lumsdaine

American University - Department of Finance and Real Estate; Erasmus University Rotterdam (EUR) - Department of Econometrics; National Bureau of Economic Research (NBER)

Michel van der Wel

Erasmus University Rotterdam; CREATES; ERIM; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 27, 2016

Abstract

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

van Dijk, Dick J.C. and Lumsdaine, Robin L. and van der Wel, Michel, Market Set-Up in Advance of Federal Reserve Policy Rate Decisions (January 27, 2016). Economic Journal, 126, 2016. Available at SSRN: https://ssrn.com/abstract=2368390 or http://dx.doi.org/10.2139/ssrn.2368390

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

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HOME PAGE: http://people.few.eur.nl/djvandijk

Robin L. Lumsdaine (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michel Van der Wel

Erasmus University Rotterdam ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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