FOMC meetings and analysts’ target-price forecasts

We investigate the effects of Federal Open Market Committee (FOMC) meetings on sell-side analysts’ target-price forecasts. Specifically, we focus on the changes in signed target-price forecast errors after FOMC meetings. Consistent with analysts’ inefficient adjustment of target prices in the presence of interest-rate changes announced by FOMC meetings, we find that target-price forecasts become overestimated (underestimated) relative to future realized prices after FOMC meetings announcing interest-rate increases (decreases). The effect is stronger when firms have a larger exposure to monetary policy changes and mitigated by the presence of in-house macroeconomists in the brokerage firms. Further analyses indicate that the findings are primarily attributable to analysts’ insufficient adjustments to discount rates used for target-price forecasts. Overall, our results suggest that analysts’ insufficient reactions to interest-rate changes lead to inaccurate target-price forecasts.