Working Paper: NBER ID: w4663
Authors: Campbell R. Harvey; Roger D. Huang
Abstract: The Federal Reserve Bank has the ability to change the money supply and to shape the expectations of market participants through their open market operations. These operations may amount to 20% of the day's volume and are concentrated during the half hour known as `Fed Time'. Using previously unavailable data on open market operations, our paper provides the first comprehensive examination of the impact of the Federal Reserve Bank's trading on both fixed income instruments and foreign currencies. Our results detail a dramatic increase in volatility during Fed Time. Surprisingly, the Fed Time volatility is higher on days when open market operations are absent. In addition, little systematic differences in market impact are observed for reserve-draining versus reserve-adding operations. These results suggest that the financial markets correctly anticipate the purpose of open market operations but are unable to forecast the timing of the operations.
Keywords: Federal Reserve; Open Market Operations; Financial Markets; Volatility; Monetary Policy
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's open market operations (E52) | volatility during 'fed time' (E52) |
| absence of open market operations (E58) | volatility (E32) |
| market participants' forecasts of Fed intentions (E47) | market reactions (G10) |
| reserve-adding operations (C69) | returns (Y60) |
| reserve-draining operations (E58) | returns (Y60) |
| private information trading dynamics (D82) | challenges in forecasting Fed actions (E47) |