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.]
- Intelligent Trading of Seasonal Effects: A Decision Support Algorithm based on Reinforcement Learning 
- Stock Returns over the FOMC Cycle 
- Asset pricing: A tale of two days 
- Can Information Be Locked-Up? Informed Trading Ahead of Macro-News Announcements 
- Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements 
- Dissent in FOMC meetings and the announcement drift 
- Effects of explicit FOMC policy rate guidance on interest rate expectations 
- The Pre-FOMC Announcement Drift  ♠
- How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements  ♠
- Is macroeconomic announcement news priced? 
- Monetary Policy and Long-Term Real Rates  ♠
- Jumps, Interest Rates, and Monetary Policy 
- The Timing of FOMC Monetary Policy Announcements and Intraday Trading Volume Patterns 
- Global asset prices and FOMC announcements  ♠
- Does FOMC news increase global FX trading? 
- The impact of U.S. central bank communication on European and pacific equity markets 
- Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements  ♠
- Exchange Rates and FOMC Days 
- What Explains the Stock Market’s Reaction to Federal Reserve Policy?  ♠
- Monetary Policy Tick-by-Tick  ♠
- Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements  ♠
- Eyes on the Prize: How Did the Fed Respond to the Stock Market? 
- The Greenspan Effect on Equity Markets: An Intraday Examination of US Monetary Policy Announcements 
- What the FOMC Says and Does When the Stock Market Booms  ♠
- Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market  ♠
- Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange  ♠
- New evidence on the effects of US monetary policy on exchange rates 
- Monetary policy surprises and interest rates: Evidence from the Fed funds futures market  ♠
- Making News: Financial Market Effects of Federal Reserve Disclosure Practices  ♠
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 
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.
Stock Returns over the FOMC Cycle
Authors [Year]: Anna Cieslak, Adair Morse, Annette Vissing-Jorgensen 
Abstract: We document that since 1994 the US equity premium follows an alternating weekly pattern measured in FOMC cycle time, i.e. in time since the last Federal Open Market Committee meeting. 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). We show that this pattern is likely to reflect a risk premium for news (about monetary policy or the macro economy) coming from the Federal Reserve: (1) The FOMC calendar is quite irregular and changes across sub-periods over which our finding is robust. (2) Even weeks in FOMC cycle time do not line up with other macro releases. (3) Volatility in the fed funds futures market and the federal funds market (but not to the same extent in other markets) peaks during even weeks in FOMC cycle time. (4) Information processing/decision making within the Fed tends to happen bi-weekly in FOMC cycle time: Before 1994, when changes to the Fed funds target in between meetings were common, they disproportionately took place during even weeks in FOMC cycle time. In addition, after 2001 Board of Governors discount rate meetings (at which the board aggregates policy requests from regional federal reserve banks and receives staff briefings) tend to take place bi-weekly in FOMC cycle time. As for how the information gets from the Federal Reserve to the market, we rule out the Federal Reserve signaling policy via open market operations post-1994. Furthermore, the high return weeks do not systematically line up with official information releases from the Federal Reserve or with the frequency of speeches by Fed officials. We end with a discussion of quiet policy communications and unintended information flows.
Asset pricing: A tale of two days
Authors [Year]: Pavel Savor, Mungo Wilson 
Journal [Citations]: Journal of Financial Economics, 113(2), pp171–201 
Abstract: We show that asset prices behave very differently on days when important macroeconomic news is scheduled for announcement. In addition to significantly higher average returns for risky assets on announcement days, return patterns are much easier to reconcile with standard asset pricing theories, both cross-sectionally and over time. On such days, stock market beta is strongly related to average returns. This positive relation holds for individual stocks, for various test portfolios, and even for bonds and currencies, suggesting that beta is after all an important measure of systematic risk. Furthermore, a robust risk–return trade-off exists on announcement days. Expected variance is positively related to future aggregated quarterly announcement day returns, but not to aggregated non-announcement day returns. We explore the implications of our findings in the context of various asset pricing models.
Can Information Be Locked-Up? Informed Trading Ahead of Macro-News Announcements
Authors [Year]: Gennaro Bernile, Jianfeng Hu, Yuehua Tang 
Journal [Citations]: 
Abstract: U.S. government agencies routinely allow pre-release access to macroeconomic data to accredited news agencies under embargo agreements (i.e., news embargo or lockup). We use high frequency data to investigate whether there is informed trading in major equity index futures and exchange traded funds during lockup periods prior to salient macro-news announcements. Consistent with information leakage, we find robust evidence of informed trading during lockup periods ahead of the Federal Open Market Committee (FOMC) monetary policy announcements. In particular, during FOMC’s lockups, both the E-mini S&P 500 futures’ average abnormal order imbalance, 8.4%-9.5%, and its average abnormal price run-up, 20.5 basis points, are statistically significant and in the direction of the subsequent policy surprise. Across the four markets that we examine, estimates of informed traders’ aggregate dollar profits during lockups ahead of all FOMC’s surprise announcements range between $14 and $256 million. While our evidence challenges the effectiveness of the FOMC’s lockup practices, we find no evidence of informed trading ahead of nonfarm payroll, CPI, and GDP data releases by other government agencies.
Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements
Authors [Year]: Kevin Krieger, Nathan Mauck, Joseph Vasquez 
Journal [Citations]: MPRA Paper,
Abstract: We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We confirm prior findings that VIX declines on FOMC meetings days. We present new findings that indicate that VDAX declines on FOMC meeting days, but is not related to ECB meeting days. VIX is unrelated to ECB meeting days. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to no relation between uncertainty levels and the ECB. JEL
Dissent in FOMC meetings and the announcement drift
Authors [Year]: Carlos Madeira, João Madeira 
Abstract: We fi nd that communication of the votes of Federal Open Market Committee members affects stock returns around the days of announcements. Since votes have been made public through press statements in 2002, stock markets gain value when votes are unanimous but lose value when dissent occurs. This pattern extends to US fi rm-size and industry portfolios and major international equity indexes. We reject diferences in risk, trading volume and expectations of future monetary policy as the likely explanations for the phenomenon. We conclude that the cause lies in dissent votes leading to pessimistic changes in the expectations of the macroeconomic outlook.
Effects of explicit FOMC policy rate guidance on interest rate expectations
Authors [Year]: Richhild Moessner 
Journal [Citations]: Economics Letters, 121(2), pp170–173 
Abstract: We quantify the impact of explicit FOMC policy rate guidance announcements at the zero lower bound on Eurodollar interest rate futures. We find that they significantly reduced implied interest rates and led to a flattening of the yield curve
The Pre-FOMC Announcement Drift ♠
Authors [Year]: David O. Lucca, Emanuel Moench 
Journal [Citations]: Journal of Finance, 
Abstract: We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre-FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre-FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to pre-announcement excess equity returns. Pre-FOMC returns are higher in periods when the slope of the Treasury yield curve is low, implied equity market volatility is high, and when past pre-FOMC returns have been high. We discuss challenges at explaining these returns with standard asset pricing theory.
How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements ♠
Authors [Year]: Pavel Savor, Mungo Wilson 
Journal [Citations]: Journal of Financial and Quantitative Analysis, 48(2), pp343-375 
Abstract: Stock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement-day excess return from 1958 to 2009 is 11.4 basis points (bp) versus 1.1 bp for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is 10 times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.
Is macroeconomic announcement news priced?
Authors [Year]: Peter C. de Goeij, Jiehui Hu, Bas J. M. Werker 
Journal [Citations]: Netspar Discussion Paper , 02/2009-053 
Abstract: We show that news on the state of the economy released via scheduled macroeconomic announcements changes the risk-return relation for stocks. Consistent with the predictions from theory, macroeconomic announcement news commands an asymmetric premium, which depends on the state of the economy. First, macroeconomic news constitutes priced risk which is not captured by the market, size, value or momentum factors. For example, exposure to news on higher output is rewarded with a annualized price of risk of 2.832% during expansions and an annualized price of risk of -7.008% during contractions. Simultaneously, the occurrence of macroeconomic news events changes the rewards investors require for holding the market, size, value and momentum factors. Our results explain that average returns are different on macroeconomic announcement days and show that, when news on the state of the economy is released, stock returns are driven by fundamental risks.
Monetary Policy and Long-Term Real Rates ♠
Authors [Year]: Samuel G. Hanson, Jeremy C. Stein 
Journal [Citations]: Harvard Business School Working Paper, 13-008 
Abstract: Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. 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. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from “yield-oriented” investors. We find some evidence supportive of this channel.
Jumps, Interest Rates, and Monetary Policy
Authors [Year]: Januj Juneja, Kuntara Pukthuanthong 
Abstract: Using daily returns to LIBOR and the US Treasury, we study prominent non-parametric jump measures to test whether the periods of highest jumps occur at the same time as FOMC and MPC meetings, and NBER recession periods. The results suggest important behavior patterns of the FOMC and MPC; unscheduled meetings by the Fed tend to occur before dates when jumps in UK and US interest rates are strongly correlated and in the presence of jumps in monetary policy. The suggested patterns provide implications for portfolio managers who can use jump detection to devise strategies for optimal diversification of correlated events.
The Timing of FOMC Monetary Policy Announcements and Intraday Trading Volume Patterns
Authors [Year]: Konstantin Tyurin, Kristofor Fan 
Abstract: In this research note, we present empirical evidence on distinct intraday volume patterns observed on scheduled FOMC meeting announcement days. Until 2011 the meeting summaries and the news about the target federal funds rate level were publicly released around 2:15PM EST on last days of FOMC meetings. On April 27 th 2011, FOMC changed its announcement timing for the first time, as it released the meeting summary at 12:30PM. Since then, FOMC followed this practice since then approximately half of the time. Early announcements are followed by publicizing of US macroeconomic forecast numbers at 2:00PM and press conferences of the Fed Chairman at 2:15PM
Global asset prices and FOMC announcements ♠
Authors [Year]: Joshua Hausman, Jon Wongswan 
Journal [Citations]: Journal of International Money and Finance, 30(3), pp547–571 
Abstract: This paper analyzes the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short- and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the expected path of future monetary policy (path surprise). We find that different asset classes respond to different components of the monetary policy surprises. Global equity indexes respond mainly to the target surprise; exchange rates and long-term interest rates respond mainly to the path surprise; and short-term interest rates respond to both surprises. On average, a hypothetical surprise 25-basis-point cut in the federal funds target rate is associated with about a 1 percent increase in foreign equity indexes and a 5 basis point decline in foreign short-term interest rates. A surprise 25-basis-point downward revision in the expected path of future policy is associated with about a ½ percent decline in the exchange value of the dollar against foreign currencies and 5 and 8 basis point declines in short- and long-term interest rates, respectively. We also find that asset prices’ responses to FOMC announcements vary greatly across countries, and that these cross-country variations in the response are related to a country’s exchange rate regime. Equity indexes and interest rates in countries with a less flexible exchange rate regime respond more to U.S. monetary policy surprises. In addition, the cross-country variation in the equity market response is strongly related to the percentage of each country’s equity market capitalization owned by U.S. investors. This result suggests that investors’ asset holdings may play a role in transmitting monetary policy surprises across countries.
Does FOMC news increase global FX trading?
Authors [Year]: Andreas M. Fischer, Angelo Ranaldo 
Journal [Citations]: Journal of Banking & Finance, 35(11), pp2965–2973 
Abstract: Does global currency volume increase on Federal Open Market Committee (FOMC) days? To test hypotheses of abnormal currency volume on FOMC days, a new data set from the Continuous Linked Settlement (CLS) Bank is used. The CLS measure captures more than half of the global trading volume in foreign exchange (FX) markets. The evidence shows that FX trading volume increases about 5% in the spot and the spot-next market following FOMC deliberations. The novelty of this result is that the aggregated CLS data controls for responses in various derivatives markets: a feature that existing studies based on intradaily data for specific trading platforms do not consider.
The impact of U.S. central bank communication on European and pacific equity markets
Authors [Year]: Bernd Hayo, Ali M. Kutan, Matthias Neuenkirch 
Journal [Citations]: Economics Letters, 108(2), pp172–174 
Abstract: We examine the effects of U.S. target rate changes and FOMC communications on European and Pacific equity market returns and find that both have a significant impact. European markets are influenced by a greater variety of communications than Pacific markets.
Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements ♠
Authors [Year]: David O. Lucca, Francesco Trebbi 
Journal [Citations]: NBER Working Paper, pp15367 
Abstract: We present a new automated, objective and intuitive scoring technique to measure the content of central bank communication about future interest rate decisions based on information from the Internet and news sources. We apply the methodology to statements released by the Federal Open Market Committee (FOMC) after its policy meetings starting in 1999. Using intra-day financial quotes, we find that short-term nominal Treasury yields respond to changes in policy rates around policy announcements, whereas longer-dated Treasuries mainly react to changes in policy communication. Using lower frequency data, we find that changes in the content of the statements lead policy rate decisions by more than a year in univariate interest rate forecasting and vector autoregression (VAR) models. When we estimate Treasury yield responses to the shocks identified in the VAR, we find communication to be a more important determinant of Treasury rates than contemporaneous policy rate decisions. These results are consistent with the view that the FOMC releases information about future policy rate actions in its statements and that market participants incorporate this information when pricing longer-dated Treasuries. Finally, we decompose realized policy rate decisions using a forward-looking Taylor rule model. Based on this decomposition, we find that FOMC statements contain significant information regarding both the predicted rule-based interest rate and the Taylor-rule residual component, and that content of the statements leads the residual by a few quarters.
Exchange Rates and FOMC Days
Authors [Year]: Seung Chan Ahn, Michael Melvin 
Journal [Citations]: Journal of Money, Credit and Banking, 39(5), pp1245–1266 
Abstract: Federal Open Market Committee (FOMC) meeting days provide a natural laboratory for exploring the effects of policy uncertainty and learning on exchange rate determination. A reasonable hypothesis is that the meeting outcomes are price-relevant public information associated with a switch to an “informed-trading state.” Evidence is provided by intradaily exchange rates for 10 FOMC meetings. A particularly interesting finding is that the informed-trading regime tends to emerge during the time that the FOMC meets. An extensive search of public news indicates that the informed trading cannot be explained as the response to public information.
What Explains the Stock Market’s Reaction to Federal Reserve Policy? ♠
Authors [Year]: Ben S. Bernanke, Kenneth N. Kuttner 
Journal [Citations]: The Journal of Finance, 60(3), pp1221–1257 
Abstract: This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives of both measuring the average reaction of the stock market and understanding the economic sources of that reaction. We find 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. Adapting a methodology due to Campbell and Ammer, we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.
Monetary Policy Tick-by-Tick ♠
Authors [Year]: Michael J. Fleming, Monika Piazzesi 
Journal [Citations]: 
Abstract: Analysis of high-frequency data shows that Treasury note yields are highly volatile around FOMC announcements, even though the average effects of fed funds target rate surprises on such yields are fairly modest. We partially resolve this puzzle by showing that yield changes seem to depend not only on the surprises themselves, but on the shape of the yield curve at the time of announcement. We also show that the reaction of yields to FOMC announcements is sluggish, but that much of this sluggishness can be attributed to the few inter-meeting moves. Market liquidity around FOMC announcements behaves in a manner generally consistent with that found for other announcements, although the richness of FOMC announcement release practices induces differences in the market-adjustment process.
Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements ♠
Authors [Year]: Refet S. Gurkaynak, Brian Sack, Eric T. Swanson 
Journal [Citations]: International Journal of Central Banking, 
Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target – and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a “current federal funds rate target” factor and a “future path of policy” factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.
Eyes on the Prize: How Did the Fed Respond to the Stock Market?
Authors [Year]: Jeffrey C. Fuhrer, Geoffrey M. B. Tootell 
Journal [Citations]: FRB of Boston Public Policy Discussion Paper, 04-2 
Abstract: The appropriate role for equity prices in monetary policy deliberations has been hotly debated for some time. Recent work suggests that equity prices have affected monetary policy decisions above and beyond their indirect effect on the traditional goal variables of the FOMC. However, the correlation between stock price movements and these other goal variables has made the identification of the equity price effect problematic. Previous studies have used a forecast that embodies a different information set from the one used by the FOMC, which could bias the estimated coefficient on equity prices. The authors show that, in fact, the methods used in the earlier literature fail to adequately disentangle the observational equivalence problem. The authors then show that after controlling for the information that actually enters the FOMC’s decision-making process, equity prices have had no independent effect on monetary policy.
The Greenspan Effect on Equity Markets: An Intraday Examination of US Monetary Policy Announcements
Authors [Year]: Eric Bentzen, Peter R. Hansen, Asger Lunde, Allan Zebedee 
Abstract: This paper studies the impact of monetary policy announcements as well as expectations of future monetary policy on the stability of equity markets. Specifically, we study the changes in asset prices and volatility associated with changes in Federal Open Market Committee announcements and changes in expectation of future US monetary policy as measured.
What the FOMC Says and Does When the Stock Market Booms ♠
Authors [Year]: Stephen G. Cecchetti 
Journal [Citations]: 
Abstract: Central bankers and monetary economists continue to debate the wisdom of adjusting policy in reaction to asset price misalignments or bubbles. Experts on both sides have marshaled theoretical and practical arguments, but failed to achieve consensus. In this paper, I first summarize the argument in favor of interest rate reactions to equity price misalignments, and then provide evidence that Federal Reserve words and actions were influenced by the Internet bubble as it was in progress. That is, I show that as equity prices boomed, members of the Fed’s policymaking body, the FOMC, spoke more intensively about the stock market, and adjusted interest rates accordingly. The debate should not be about whether they should have reacted, but whether they did enough.
Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market ♠
Authors [Year]: Antulio N. Bomfim 
Journal [Citations]: Journal of Banking & Finance, 27(1), pp133–151 
Abstract: I examine pre-announcement and news effects on the stock market in the context of public disclosure of monetary policy decisions. The results suggest that the stock market tends to be relatively quiet – conditional volatility is abnormally low – on days preceding regularly scheduled policy announcements. Although this calming effect is routinely reported in anecdotal press accounts, it is statistically significant only over the past four to five years, a result that I attribute to changes in the Federal Reserve’s disclosure practices in early 1994. The paper also looks at how the actual interest rate decisions of policy makers affect stock market volatility. The element of surprise in such decisions tends to boost stock market volatility significantly in the short run, and positive surprises – higher-than-expected values of the target federal funds rate – tend to have a larger effect on volatility than negative surprises. The implications of the results for broader issues in the finance and economics literatures are also discussed.
Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange ♠
Authors [Year]: Torben G. Andersen, Tim Bollerslev, Francis X. Diebold, Clara Vega 
Journal [Citations]: NBER Working Paper, 8959 
Abstract: Using a new dataset consisting of six years of real-time exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements), we characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and the Euro. In particular, we find that announcement surprises (that is, divergences between expectations and realizations, or ‘news’) produce conditional mean jumps; hence high-frequency exchange rate dynamics are linked to fundamentals. The details of the linkage are intriguing and include announcement timing and sign effects. The sign effect refers to the fact that the market reacts to news in an asymmetric fashion: bad news has greater impact than good news, which we relate to recent theoretical work on information processing and price discovery.
New evidence on the effects of US monetary policy on exchange rates
Authors [Year]: Sarantis Kalyvitis, Alexander Michaelides 
Journal [Citations]: Economics Letters, 71(2), pp255–263 
Abstract: We examine the impact of US monetary policy shocks on exchange rates using the monetary policy indicator proposed by Bernanke and Mihov [Quarterly Journal of Economics, 113 (1998) 869–902]. We find evidence for instantaneous, rather than delayed, US dollar overshooting after a monetary shock when relative output and relative prices are included in the VAR specification. The forward premium puzzle persists due to the interest rate differential response.
Monetary policy surprises and interest rates: Evidence from the Fed funds futures market ♠
Authors [Year]: Kenneth N Kuttner 
Journal [Citations]: Journal of Monetary Economics, 47(3), pp523–544 
Abstract: This paper estimates the impact of monetary policy actions on bill, note, and bond yields, using data from the futures market for Federal funds to separate changes in the target funds rate into anticipated and unanticipated components. Interest rates’ response to anticipated target rate changes is small, while their response to unanticipated changes is large and highly significant. These responses are generally consistent with the expectations hypothesis of the term structure. Surprise target rate changes have little effect on expectations of future actions, however, which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve.
Making News: Financial Market Effects of Federal Reserve Disclosure Practices ♠
Authors [Year]: Antulio N. Bomfim, Vincent R. Reinhart 
Journal [Citations]: FEDS Working Paper, 2000-14 
Abstract: As recently as early 1994, market participants had to infer the stance of U.S. monetary policy according to the type and size of the open market operations conducted by the Federal Reserve’s Trading Desk. Thus, investors were exposed to uncertainty about both the timing and the motivation for monetary policy actions. Since then, changes in disclosure practices regarding monetary policy decisions have potentially mitigated both types of uncertainty. We examine the effects of the greater openness and transparency of these new practices on the way a wide array of financial market instruments responds to unanticipated policy decisions. In general, the financial markets’ response to policy does not seem to be related to what the Federal Reserve says after a surprise decision is announced or to when it decides to act. The invariance of the response of asset prices to policy across time and announcement regimes suggests that what the Federal Reserve says when it acts is of second-order importance to the act itself.