CBR Briefing #79

A line chart showing cumulative US stock returns, with percentage change on the y-axis, and a timeline on the x-axis surrounding the days that the Fed made a surprising policy announcement during the years of 1994 to 2009. One line starts at about zero percent fifty days before a surprisingly positive announcement and shows a steady rise through the day of the announcement and fifty days beyond reaching nearly five percent. A second line starts at about the same place, then begins a downward trend about twenty-five days before a surprisingly negative policy announcement, dropping below zero percent, and then starting to rise fifteen days later, eventually reaching nearly two percent.

When Fed announcements don’t go as expected, momentum traders gain

  • Investors in US stocks can earn significant short-term gains by exploiting stock-return movements around the Federal Reserve’s monetary-policy announcements, according to research by University of Notre Dame’s Andreas Neuhierl and Chicago Booth’s Michael Weber.
  • Around 25 days before a policy announcement accompanying a Federal Open Market Committee meeting, cumulative market returns drifted upward when the Fed went on to announce a lower-than-expected funds rate and downward when it went on to reveal a higher-than-expected rate, the researchers find. Returns continued to drift in the same direction for another 15 days after the announcement.
  • Using this momentum, a trading strategy that invests when the rate turns out lower than expected and shorts the market when the rate is higher than expected will yield a better return than a passive buy-and-hold strategy, the research suggests.

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