The Dollar Ahead of FOMC Target Rate Changes

51 Pages Posted: 27 Jul 2018 Last revised: 26 Feb 2020

See all articles by Nina Karnaukh

Nina Karnaukh

Ohio State University; Fisher College of Business - Department of Finance

Date Written: January 31, 2020

Abstract

I find that the U.S. dollar appreciates before contractionary monetary policy decisions at scheduled Federal Open Market Committee meetings and depreciates before expansionary decisions. The federal funds futures rate forecasts these dollar movements with a 22% R2. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. This predictability is concentrated in times of high FX volatility, as the FX traders avoid arbitrage risk earlier than a few days prior to the announcement.

Keywords: exchange rates, monetary policy, federal funds futures, predictability

JEL Classification: F31, G12, G17, E52

Suggested Citation

Karnaukh, Nina, The Dollar Ahead of FOMC Target Rate Changes (January 31, 2020). Fisher College of Business Working Paper No. 2018-03-014, Available at SSRN: https://ssrn.com/abstract=3221318 or http://dx.doi.org/10.2139/ssrn.3221318

Nina Karnaukh (Contact Author)

Ohio State University; Fisher College of Business - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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