FOMC announcements and financial markets

The Federal Open Market Committee (FOMC) is the monetary policy-making body of the U.S. Federal Reserve System.

Since 1981, the FOMC has had eight scheduled meetings per year, the timing of which is quite irregular, The schedule of meetings for a particular year is announced ahead of time.

Starting in 1994, the FOMC began to issue a policy statement (“FOMC statement”) after the meetings that summarised the Committee’s economic outlook and the policy decision at that meeting. The FOMC statements are released around 2:15 pm Eastern Time. Before 1994 monetary policy decisions were not announced; investors therefore had to guess policy actions from the size and type of open market operations in the days following each meeting.

There has been academic interest in the influence of these announcements on the relationship between monetary policy actions and financial markets.

This article presents a brief review and listing of academic papers on FOMC announcements and financial markets.

Bomfim and Reinhart (2000) analysed the reaction of financial markets in the period after 1994 when the Federal Reserve started explicitly announcing its monetary policy decisions. They commented that the changes in disclosure practices potentially reduced the uncertainty about both the timing and the motivation for monetary policy actions. In their research they found little relation between the financial markets and the announcement of surprise decisions by the Fed. They concluded that Federal Reserve actions were more important for financial markets than their announcements.

The following year Kuttner (2001) analysed the impact of monetary policy actions on bill, note, and bond yields. Kuttner found that the response of interest rates to anticipated target rate changes was small, while their response to unanticipated changes was large and highly significant.

Regarding foreign exchange, Kalyvitis and Michaelides (2001) found evidence for an immediate overshooting effect for the US dollar in response to monetary policy shocks (unanticipated policy decisions). Andersen et al (2002), found that announcement surprises produced US dollar rate jumps, and concluded that high-frequency exchange rate dynamics are linked to fundamentals. They also observed that the market’s reaction was asymmetric: bad news having a greater impact than good news.

Bomfim (2003) focused on the stock market which was found to experience abnormally low volatility on days preceding scheduled policy announcements. Although this effect had been only significant in the previous four to five years. The paper also found that the element of surprise in announcements tended to boost stock market volatility significantly in the short run, with positive surprises (higher-than-expected values of the target federal funds rate) having a greater effect than negative ones.

Gurkaynak et al (2005) proposed that when investigating the effects of U.S. monetary policy on asset prices it was important to consider two factors: the current federal funds rate target and the future path of policy. By analysing high-frequency data from 1990 they found that both factors had important but differing effects on asset prices, and that FOMC statements had a much greater impact on longer-term Treasury yields.

Fleming and Piazzesi (2005) observed that while Treasury note yields were highly volatile around FOMC announcements, the average effect of Fed funds target rate surprises on such yields was less marked. Their explanation was that yield changes were dependent not only on the announcement surprises themselves but also on the shape of the yield curve at the time.

The most cited paper on this topic is Bernanke and Kuttner (2005) which attempted to quantify the effect of Fed actions and found that on average a hypothetical unanticipated 25-basis-point cut in the Federal funds rate target is associated with about a 1% increase in broad stock indexes. They also found that the effects of unanticipated monetary policy actions on expected excess returns accounted for the largest part of the response of stock prices.

Lucca and Trebbi (2009) presented a technique to automatically score the content of central bank communication about future interest rate decisions from various news sources. Applying this technique to FOMC statements they found that short-term nominal Treasury yields responded to changes in policy rates around policy announcements, whereas longer-dated Treasuries mainly reacted to changes in forward policy communication.

On the possible international effect, Hayo et al (2010) found that FOMC communication had a significant impact on European and, to a slightly lesser extent, Pacific equity markets. The following year Hausman and Wongswan (2011) broadened the scope to look at global asset prices and found that global equity indexes responded mainly to target surprises (changes to the current target federal funds rate); exchange rates and long-term interest rates responded mainly to the path surprises (revisions to the expected path of future monetary policy); and short-term interest rates respond to both surprises. They also found that the effect of FOMC announcements varied across countries, dependent on a country’s exchange rate regime (for equity and interest rates) and the scale of U.S. investment in the market (for equities).

Hanson and Stein (2012) challenged the standard model that macro policy can not move longer-term real rates, by finding that a 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate.

Previously most papers had looked at the effect of FOMC announcements on financial markets on the day of the announcement or subsequent to it, but Lucca and Moench (2013) found large average excess returns on U.S. equities in the 24-hour period immediately before the announcements. Further, these excess returns have increased over time and they account for sizable fractions of total annual realized stock returns (an extraordinary result). They found that such pre-FOMC excess returns occurred also in major international equity indices, although they found no such effect in U.S. Treasury securities and money market futures. On a similar topic Bernile et al (2014), found evidence of informed trading during lockup periods ahead of FOMC announcements. Putting a monetary figure on this action they estimated that informed traders’ aggregate dollar profits ranged between $14 and $256 million.

Madeira and Madeira (2014) looked at the votes of the FOMC members (made public since 2002) and found that equities increased when votes were unanimous but fell when there was dissent.

Cieslak et al (2014) documents an astonishing finding, that the US equity premium follows an alternating weekly pattern measured in FOMC cycle time. In other words, the equity premium is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day).

INDEX (of papers listed below)

[Papers listed in reverse date order; indicates major paper.]

  1. Intelligent Trading of Seasonal Effects: A Decision Support Algorithm based on Reinforcement Learning [2014]
  2. Stock Returns over the FOMC Cycle [2014]
  3. Asset pricing: A tale of two days [2014]
  4. Can Information Be Locked-Up? Informed Trading Ahead of Macro-News Announcements [2014]
  5. Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements [2014]
  6. Dissent in FOMC meetings and the announcement drift [2014]
  7. Effects of explicit FOMC policy rate guidance on interest rate expectations [2013]
  8. The Pre-FOMC Announcement Drift [2013]
  9. How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements [2013]
  10. Is macroeconomic announcement news priced? [2013]
  11. Monetary Policy and Long-Term Real Rates [2012]
  12. Jumps, Interest Rates, and Monetary Policy [2012]
  13. The Timing of FOMC Monetary Policy Announcements and Intraday Trading Volume Patterns [2012]
  14. Global asset prices and FOMC announcements [2011]
  15. Does FOMC news increase global FX trading? [2011]
  16. The impact of U.S. central bank communication on European and pacific equity markets [2010]
  17. Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements [2009]
  18. Exchange Rates and FOMC Days [2007]
  19. What Explains the Stock Market’s Reaction to Federal Reserve Policy? [2005]
  20. Monetary Policy Tick-by-Tick [2005]
  21. Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements [2005]
  22. Eyes on the Prize: How Did the Fed Respond to the Stock Market? [2004]
  23. The Greenspan Effect on Equity Markets: An Intraday Examination of US Monetary Policy Announcements [2004]
  24. What the FOMC Says and Does When the Stock Market Booms [2003]
  25. Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market [2003]
  26. Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange [2002]
  27. New evidence on the effects of US monetary policy on exchange rates [2001]
  28. Monetary policy surprises and interest rates: Evidence from the Fed funds futures market [2001]
  29. Making News: Financial Market Effects of Federal Reserve Disclosure Practices [2000]


Intelligent Trading of Seasonal Effects: A Decision Support Algorithm based on Reinforcement Learning
Authors [Year]: Dennis Eilers, Christian L. Dunis, Hans-Jörg von Mettenheim, Michael H. Breitner [2014]
Journal [Citations]: Decision Support Systems,
Abstract: Seasonalities and empirical regularities on financial markets have been well documented in the literature for three decades. While one should suppose that documenting an arbitrage opportunity makes it vanish there are several regularities that have persisted over the years. These include, for example, upward biases at the turn-of-the-month, during exchange holidays and the pre-FOMC announcement drift. Trading regularities is already in and of itself an interesting strategy. However, unfiltered trading leads to potential large drawdowns. In the paper we present a decision support algorithm which uses the powerful ideas of reinforcement learning in order to improve the economic benefits of the basic seasonality strategy. We document the performance on two major stock indices.
Ref: AA929
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The Scottish Portfolio

In July 1698 a flotilla of five ships set sail from Leith, Scotland for Panama. Scotland had seen the colonisation successes of other European nations and wanted to get in on the action. So £400,000 was raised (about a fifth of all the wealth in Scotland at the time) for the Company of Scotland for Trading to Africa, and off they set westwards to the New World (the “Africa” part having been forgotten – investors didn’t seem to mind, or know). The venture became known as the Darien Scheme and the new colony in Panama was to be called Caledonia.

It did not turn out well. Lack of food and water, disease, drunkenness and, finally, a Spanish siege led to the abandonment of the colony in 1700. The effect on Scotland was traumatic. Many of the nobles and landowners were financially ruined and the morale such that many no longer believed Scotland could be an independent major power. The failure of the Darien Scheme is thought to have been a major factor in driving Scotland to signing the 1707 Act of Union with England.

In September, 207 years later, Scotland will be voting on whether to regain independence (coincidentally, again in the wake of a financial disaster – this time the recent credit crunch).

What would an independent Scotland look like to investors?

One way of analysing this is to look at the current Scottish companies listed on the LSE. The following chart plots the performance of a “Scottish” portfolio over the last ten years. The equally-weighted portfolio consists of the seven companies: Aberdeen Asset Management, Aggreko, Lloyds Banking Group, Royal Bank of Scotland Group (The), Standard Life, Weir Group, Wood Group (John); they were selected as having their company address in Scotland and being in the FTSE 100 Index.

Scottish PortfolioNot too impressive – over the ten years the Scottish portfolio would have massively under-performed the FTSE 100 Index.


Perhaps we should look at the portfolio without the banks; obviously the presence of RBS and Lloyds greatly affected the performance. So, the following chart is as above but this time without the bothersome banks.

Scottish Portfolio excl banksQuite a different story. And all five companies in the portfolio contributed to the strong out-performance of the FTSE 100 Index.

So, does this reflect the true strength of the real Scottish economy?

Perhaps. But we do seem to remember that before the credit crunch supporters of Scottish independence were claiming that the Scottish financial industry – led by the banks – would be one of the economic pillars of a newly independent Scotland.

Extract from The UK Stock Market Almanac 2014

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RPS Group [RPS] – 27 years on the LSE

On this day in 1987 RPS Group listed on the LSE.

Monthly seasonality of RPS Group

The following chart plots the average monthly out-performance of the shares over the FTSE 100 Index since 1988. For example, on average RPS Group has out-performed the FTSE 100 by 5.1 percentage points in March.
Average monthly performance of RPS Group [RPS] relative to the FTSE 100 Index (1988-2013)


  1. The strongest month for RPS Group shares relative to the market has been March (the shares have out-performed the market in this month in 16 of the last 25 years).
  2. The weakest month for RPS Group relative to the market has been October (the shares have only out-performed the market in this month in 9 of the past 26 years).

RPS Group is in the FTSE 350 Support Services [NMX2790] sector.

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FTSE 250 Index month end values 1986-2014

The following table shows the month-end and year-end values of the FTSE 250 Index.

NB. The FTSE 250 Index was launched on 12 October 1992, but the base date for the index was 31 December 1985.



See also

Other articles about the FTSE 250 Index.

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RSA Insurance Group [RSA] – 25 years on the LSE

On this day in 1989 RSA Insurance Group listed on the LSE.

Monthly seasonality of RSA Insurance Group

The following chart plots the average monthly out-performance of the shares over the FTSE 100 Index since 1989. For example, on average RSA Insurance Group has out-performed the FTSE 100 by 1.2 percentage points in November.
Average monthly performance of RSA Insurance Group [RSA] relative to the FTSE 100 Index (1989-2013)


  1. The strongest month for RSA Insurance Group shares relative to the market has been November (the shares have out-performed the market in this month in 14 of the last 25 years).
  2. The weakest month for RSA Insurance Group relative to the market has been March (the shares have only out-performed the market in this month in 9 of the past 24 years).

RSA Insurance Group is in the FTSE 350 Nonlife Insurance [NMX8530] sector.

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Strong/weak sectors in July

Strong sectors

The table below lists the sectors that have historically out-performed the market in July.

Sector TIDM
Personal Goods
Real Estate Investment Trusts
Technology Hardware & Equipment

Weak sectors

The table below lists the sectors that have historically under-performed the market in July.

Sector TIDM
Gas, Water & Multiutilities
Industrial Transportation
Support Services

See also

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Chemring Group [CHG] – 40 years on the LSE

On this day in 1974 Chemring Group listed on the LSE.

Monthly seasonality of Chemring Group

The following chart plots the average monthly out-performance of the shares over the FTSE 100 Index since 1988. For example, on average Chemring Group has out-performed the FTSE 100 by 4.4 percentage points in January.
Average monthly performance of Chemring Group [CHG] relative to the FTSE 100 Index (1988-2013)


  1. The strongest month for Chemring Group shares relative to the market has been January (the shares have out-performed the market in this month in 15 of the last 25 years).
  2. The weakest month for Chemring Group relative to the market has been October (the shares have only out-performed the market in this month in 9 of the past 26 years).

Chemring Group is in the FTSE 350 Aerospace & Defense [NMX2710] sector.

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The Stock Market in July

After the weakest two-month period of the year, things improve for investors in this month. July ranks 5th of all months for performance: on average the market increases 0.8% in July, with a probability of a positive return of 55%. Although, in recent years, the market has been unusually strong: as can be seen from the accompanying chart, the market has risen over 6% three times in the past five years.

Monthly returns of FTSE All Share Index - July (1982-2013)The start of the month tends to be strong: the first trading day (FTD) is one of the strongest FTDs for any month in the year, and the first week of the month is among the top ten strongest weeks in the year. After that, the market has a propensity to drift lower for a couple of weeks until finishing strongly in the final week of the month.


The sectors which tend to be strong in July are Chemicals, Personal Goods and Technology Hardware & Equipment; while the weak sectors are: Beverages, Gas, Water & Multiutilities and Support Services.


At the stock level, the five strongest FTSE 350 companies in July have recently been Greene King, Pace, Brown (N) Group, Wetherspoon (J D) and Dairy Crest Group; Greene King is the only FTSE 350 company whose shares have risen every July in the past ten years. Two weak July stocks are Petra Diamonds and Man Group.

July has been the most active month for flotations; over 50 of the companies in the FTSE 350 Index have had their IPOs in this month. For example, the 18th July will see the 20th anniversary of the listing of 3i Group.

It’s also a busy month for companies announcing their interim results: 23 FTSE 100 companies will be doing so, and 44 FTSE 250 companies.


On the economics front: there is the MPC interest rate announcement on the 10th, the US Nonfarm payroll report on the 11th, and the two-day FOMC meeting starts on the 29th.

The New York Stock Exchange will be closed for Independence Day on the 4th July.

And the significance of that for UK investors is what?

I’m glad you asked. A recent academic paper presents research that shows that when the US markets are on holiday but European markets are open, the latter markets enjoy abnormally high and positive returns. There are six such holidays in the year.

And, finally, to the question: do winners of the FIFA World Cup see a fillip in their national stock market? Short answer: no.

Article first appeared in Money Observer

Further articles on April.

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First trading day of July

Tomorrow will be the first trading day (FTD) of July.

Since 1984, the FTSE 100 Index has an average return of 0.48% on the July FTD (16 times the average daily return on all days), which makes it the third strongest FTD of the year. Although, as can be seen in the chart, the market has suffered two large falls in the past five years on this day.

The following chart shows the returns for every July FTD since 1984.

First trading day of July (1984-2013) [2014]


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Last trading day of June

Today is the last trading day (LTD) of June.

Since 1984 the index average return on the June LTD has been 0.18%, which makes it the third strongest month LTD of the year. The probability of a increase on the June LTD is 67%

The following chart shows the FTSE 100 Index returns for every June LTD since 1984.

Last trading day of June (1984-2013) [2014]


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