Market Set-Up in Advance of Federal Reserve Policy Decisions

This paper considers the uncertainty associated with upcoming Federal Open Market Committee (FOMC) announcements and the extent to which the market begins to set up for such announcements well before they actually occur. We demonstrate that markets set up well in advance of known announcement days; as a result, there is often less uncertainty in the period immediately preceding an FOMC announcement, despite greater volume of activity, as the market has already incorporated anticipated signals. We consider the relative importance of both macro announcements and central bank officials' speeches and congressional testimony in shaping market expectations. We find substantial evidence of anticipatory effects; these results are particularly relevant as the Fed develops its communication strategy to achieve an orderly exit from its program of quantitative easing.