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Making news: financial market effects of Federal Reserve disclosure practices

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  • Antulio N. Bomfim
  • Vincent Reinhart

Abstract

As recently as early 1994, market participants had to infer the stance of U.S. monetary policy according to the type and size of the open market operations conducted by the Federal Reserve's Trading Desk. Thus, investors were exposed to uncertainty about both the timing and the motivation for monetary policy actions. Since then, changes in disclosure practices regarding monetary policy decisions have potentially mitigated both types of uncertainty. We examine the effects of the greater openness and transparency of these new practices on the way a wide array of financial market instruments respond to unanticipated policy decisions. In general, the financial markets' response to policy does not seem to be related to what the Federal Reserve says after a surprise decision is announced or to when it decides to act. The invariance of the response of asset prices to policy across time and announcement regimes suggests that what the Federal Reserve says when it acts is of second-order importance to the act itself.

Suggested Citation

  • Antulio N. Bomfim & Vincent Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2000-14
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    References listed on IDEAS

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    Cited by:

    1. Demertzis, Maria & Hughes Hallett, Andrew, 2007. "Central Bank transparency in theory and practice," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 760-789, December.
    2. Michael Ehrmann & Marcel Fratzscher, 2007. "Transparency, Disclosure, and the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 179-225, March.
    3. Brissimis, Sophocles N. & Magginas, Nicholas S., 2006. "Forward-looking information in VAR models and the price puzzle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1225-1234, September.
    4. William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 255-298, December.
    5. Donald L. Kohn & Brian P. Sack, 2003. "Central bank talk: does it matter and why?," Finance and Economics Discussion Series 2003-55, Board of Governors of the Federal Reserve System (U.S.).
    6. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    7. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    8. Kobayashi, Teruyoshi, 2009. "Announcements and the effectiveness of monetary policy: A view from the US prime rate," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2253-2266, December.
    9. Bernoth, Kerstin & von Hagen, Jürgen, 2003. "The performance of the Euribor futures market: Effficiency and the impact of ECB policy announcements," ZEI Working Papers B 27-2003, University of Bonn, ZEI - Center for European Integration Studies.
    10. Jeff Moore & Richard Austin, 2002. "The behavior of federal funds futures prices over the monetary policy cycle," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 45-61.
    11. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Papers 0229, Banco de España;Working Papers Homepage.
    12. Kenneth N. Kuttner & Adam S. Posen, 2000. "Inflation, Monetary Transparency, and G3 Exchange Rate Volatility," Working Paper Series WP00-6, Peterson Institute for International Economics.
    13. Don Bredin & Gerard O’Reilly & Simon Stevenson, 2007. "Monetary Shocks and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 315-331, October.
    14. Don Bredin & Caroline Gavin & Gerard O Reilly, 2003. "The Influence of Domestic and International Interest Rates on the ISEQ," The Economic and Social Review, Economic and Social Studies, vol. 34(3), pages 249-265.
    15. Antulio N. Bomfim, 2000. "Pre-announcement effects, news, and volatility: monetary policy and the stock market," Finance and Economics Discussion Series 2000-50, Board of Governors of the Federal Reserve System (U.S.).
    16. Dobromł Serwa, 2006. "Do emerging financial markets react to monetary policy announcements? Evidence from Poland," Applied Financial Economics, Taylor & Francis Journals, vol. 16(7), pages 513-523.
    17. Adam S. Posen, 2002. "Does it pay to be transparent? international evidence form central bank forecasts - commentary," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 119-126.
    18. Prabu A, Edwin & Bhattacharyya, Indranil & Ray, Partha, 2016. "Is the stock market impervious to monetary policy announcements: Evidence from emerging India," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 166-179.
    19. Joe Lange & Brian P. Sack & William C. Whitesell, 2001. "Anticipations of monetary policy in financial markets," Finance and Economics Discussion Series 2001-24, Board of Governors of the Federal Reserve System (U.S.).
    20. Bomfim, Antulio N., 2003. "Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 133-151, January.

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    Keywords

    Monetary policy ; Financial markets ; Open market operations;

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