FOMC Announcements and Market Reactions From 1998 to 2022

Abstract

This article examines the market reactions to Federal Open Market Committee (FOMC) announcements from 1998 to 2022. The study's key finding is that U.S. capital markets tended to consistently record a worse-than-average performance during the days leading to the announcements and especially following the announcements. Concurrently, volatility tended to be significantly higher during the same periods rather than other periods. The study analyzed the changes in the federal funds rate and the target rate that the FOMC sets and compared them with the changes in the futures market to account for the market's surprises. We found that the negative performance was most accentuated when the market did not fully anticipate FOMC decisions. With respect to volatility, our data indicated that the standard deviation of the daily returns was higher when the FOMC decision represented a surprise and lower when not. We also observed that average volumes tended to increase while the momentum worsened for the periods leading to the announcement date. Overall, our findings suggest that the market may not always fully understand the implications of investing in the days that lead to the FOMC decisions, or some investors might take a speculative approach during those days. Our study also investigated the factors that may have contributed to the market's irrational response, including uncertainty about the future, unexpected economic conditions, and market sentiment. The article concludes that understanding the market's reaction to FOMC announcements is essential for investors and highlights the need for further research on this topic.