Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements
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What they found
The authors showed that a single 'surprise' number cannot capture what markets learn from an FOMC announcement. Using intraday data on futures and Treasuries around announcements from 1990 to 2004, they extracted two factors: a target factor (the surprise in the current rate) and a path factor (the surprise in the expected future path of rates, driven by the statement's language). The path factor explained most of the movement in longer-term yields and became far more important after the Fed began issuing statements in 1994. Words moved markets as much as actions.
What you can use
- The statement matters as much as the rate decision; the market reprices the expected path of rates, not just the current one.
- Two-year yields and equities respond to path surprises; if you trade FOMC, watch the language about future policy.
- Since forward guidance became routine, the 'action' surprise is often small and the 'words' surprise is the whole event.
Caveats
Factor extraction is statistical and the interpretation of the two factors is the authors'. Open-access journal, technical content.
Tags: macro, fed, forward-guidance, announcements
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.