Working Paper: NBER ID: w19814
Authors: Dick van Dijk; Robin L. Lumsdaine; Michel van der Wel
Abstract: This paper considers the uncertainty associated with upcoming Federal Open Market Committee (FOMC) announcements and the extent to which the market begins to set up for such announcements well before they actually occur. We demonstrate that markets set up well in advance of known announcement days; as a result, there is often less uncertainty in the period immediately preceding an FOMC announcement, despite greater volume of activity, as the market has already incorporated anticipated signals. We consider the relative importance of both macro announcements and central bank officials' speeches and congressional testimony in shaping market expectations. We find substantial evidence of anticipatory effects; these results are particularly relevant as the Fed develops its communication strategy to achieve an orderly exit from its program of quantitative easing.
Keywords: Federal Open Market Committee; FOMC; Federal Funds Rate; Market Expectations; Quantitative Easing
JEL Codes: E43; E44; E58; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prior FOMC announcements (E52) | expected federal funds futures prices (G13) |
| macroeconomic surprises (E39) | expected federal funds futures prices (G13) |
| communications from the Federal Reserve (E52) | expected federal funds futures prices (G13) |
| earlier FOMC decisions (E52) | expected federal funds futures prices (G13) |
| macroeconomic announcements during the blackout period (E60) | expected federal funds futures prices (G13) |
| impact of macro surprises (E60) | expected federal funds futures prices (G13) |
| trading volume (G15) | uncertainty preceding FOMC announcements (D84) |