Market Set‐up in Advance of Federal Reserve Policy Rate Decisions

Abstract

This article considers the extent to which the federal (fed) funds futures market prepares for Federal Open Market Committee (FOMC) announcements. We demonstrate that there is often less variation in fed funds futures prices during the period immediately preceding an FOMC announcement than in earlier periods, despite greater trading activity, as the market has already incorporated anticipated signals. We find that macro announcements and central bank officials' congressional testimony are of comparable importance, whereas speeches are relatively unimportant. In addition, macro announcements have stronger effects when they are released during the Fed's 'blackout' period, emphasising important interaction effects.