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Market Reaction to Monetary Policy NonannouncementsV. Vance Roley |
ABSTRACT This paper examines how Treasury security yields, stock prices, and federal funds futures rates respond on Federal Open Market Committee (FOMC) meeting dates when expected policy actions do not occur. The empirical results support the existence of nonannouncement effects on short- and intermediate-term yields. In particular, part of an expected policy action, measured using federal funds futures rates, is unwound when the action does not materialize. This partial unwinding is consistent with markets reacting to the surprise by postponing, but not eliminating, the possibility of a future policy action. We also find that only the response of near-term federal funds futures rates is larger after February 1994, when the Federal Reserve began making virtually all of its nonzero changes in the federal funds rate target at FOMC meetings. As a whole, our results suggest that monetary policy decisions can be informative to financial markets even when these decisions do not involve an overt policy action, and they support the view that market expectations of future policy actions are an important determinant of the behavior of interest rates. V. Vance Roley is Hughes M. Blake Professor of Business Administration at the University of Washington and a visiting scholar at the Federal Reserve Bank of Kansas City. Gordon H. Sellon, Jr., is vice president and economist at the Federal Reserve Bank of Kansas City. We thank Cathy Bonser-Neal and Craig Hakkio for helpful comments. The views expressed herein are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Board of Governors of the Federal Reserve System.Gordon H. Sellon, Jr.
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