Market Set-Up in Advance of Federal Reserve Policy Rate Decisions

This paper considers the uncertainty associated with upcoming Federal Open Market Committee (FOMC) announcements and the extent to which participants in the fed funds futures market prepare for such announcements before they actually occur. We demonstrate that markets set up well in advance of known announcement days, going back as far as six months prior to an FOMC meeting. As a result, there is often less variation in fed funds futures prices in the period immediately preceding an FOMC announcement, despite greater volume of activity, as the market has already incorpo- rated anticipated signals. We find that macro announcements and central bank officials’ speeches and congressional testimony are of comparable importance. In addition, while macro announcements have stronger effects when they are released during the Fed’s “blackout” period, congressional testimony is more important when it coincides with days when important macro variables are released.

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