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The impact of FOMC statements on the volatility of asset prices

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This article examines the impact of Federal Open Market Committee (FOMC) statements on asset prices. Statements are found to have a much more pronounced impact on the volatility of asset prices than interest rate surprises. They influence primarily stock returns, intermediate and long-term yields, whereas short-term rates are driven both by statements and by interest rate surprises. We also find that the regime shift of May 1999 has improved the effectiveness of monetary policy, as reflected in an overall reduction in market volatility during the most recent regime. In addition, markets are equally well-prepared for the upcoming rate decision in both regimes, but the process of adjustment depends on whether a statement was issued in the old regime or not. When a statement is issued, price adjustments are very similar across both periods, whereas if no statement is issued then the rate of adjustment towards the new value is more gradual and occurs throughout the entire intermeeting period.

Keywords: E52; E58; E65; FOMC statements; G12; G14; financial market volatility; interest rate surprises

Document Type: Research Article


Affiliations: Department of Economics,California State University, 800 N. State College Blvd.Fullerton,CA 92834, USA

Publication date: April 1, 2013

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