No, Really, Don’t Fight the Fed

ppteam

We’ve heard of the old market saw about not fighting the Fed, but this is a bit ridiculous.

Since the Federal Reserve’s open market committee began announcing its interest-rate decisions after meetings in 1994, excess returns on US stocks have been more than 30 times larger on the day the FOMC announces its interest-rate decisions than other days, according to a research paper from the New York Fed – and FOMC days are the only days that show a material trend.

“The findings in our paper indicate that only FOMC announcements are associated with statistically and economically significant announcement day returns,” the authors write, “and that the returns are actually earned ahead of these announcements.”

That last bit is important. The gains are made in the 24 hours ahead of, not after, the announcement, which always comes at 2:15 p.m. eastern time. In other words, the money’s made before the announcements are even announced – the actual policy itself doesn’t even matter. All that post-announcement volatility that marks most FOMC days is just so much noise.

While they can’t find a satisfying explanation for the trend, they note a few things. The gains aren’t reversed in subsequent days. Also, the volatility ahead of the meetings is relatively modest. Additionally, the trend exists only in equities; they did not find a similar pattern in other asset classes.

Talk about your easy money.