IEI Insight: Anticipation, not content, of Fed announcements may be driving markets

This IEI Insight is provided by Ryan Coughlin, a Gail Werner-Robertson Fellow and author of a forthcoming paper analyzing the effect of Federal Reserve announcements on market activity.

Previous research has shown that “surprise” portions of macroeconomic announcements have significant effects on financial markets. Further, the magnitudes of announcement effects are influenced by governmental monetary policy. Macroeconomic announcement effects follow a simple pattern: if the economy, as measured by the data in the announcement, is better than anticipated by the market consensus, equity prices are likely to trend upward for the day and bond prices are likely to head lower for the day. In other words, a macroeconomic announcement effect is the market’s reaction to incorporate unexpected historical data. However, the previous research on announcement effects was completed prior to the most recent economic downturn and the unprecedented Federal Reserve monetary policy that stemmed from it. After the implementation of monetary policies such as quantitative easing and near-zero interest rates, macroeconomic announcement effects differed from the conclusions of previous research.

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