The Pre-FOMC Announcement Drift
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What they found
Two New York Fed economists documented that from 1994 to 2011 the S&P 500 rose an average of about 49 basis points in the 24 hours before scheduled FOMC announcements, accounting for the bulk of the equity premium over that period, while the announcement itself and other days contributed little. The drift appeared in other developed equity markets around FOMC (but not around their own central banks' meetings), did not appear in bonds or currencies, and was not explained by the content of the decision or by standard risk measures. The authors could not identify the mechanism and called it a puzzle.
What you can use
- Stocks have tended to rise in the day before FOMC announcements, a pattern strong enough to account for most of the equity premium from 1994 to 2011.
- The drift happens before the news, not after, so it is not a reaction to the decision.
- The effect has been weaker and less reliable since publication, a reminder that even Fed-related patterns decay once known.
Caveats
Post-2011 evidence is mixed; some studies find the drift weakened or shifted. The mechanism is unexplained, which makes it hard to know when it will fail. A free New York Fed staff report version exists.
Tags: macro, fed, fomc, drift, calendar-effect
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.