The release of Federal Open Market Committee (FOMC) minutes increases U.S. asset price volatility and significantly affects trading volume, according to a new report from the Federal Reserve Bank of New York. However, while the financial market impact of the minutes is similar to other noteworthy macroeconomic releases, the magnitude of the response has declined in recent years.
Three weeks after each regularly scheduled meeting and policy statement, the FOMC releases detailed minutes. These minutes provide market participants with additional insight into Committee member views on the appropriate monetary policy stance and U.S. economic outlook. Yet, little is known about the real-time market response to this information.
In “The Financial Market Effect of FOMC Minutes,” economist Carlo Rosa attempts to gauge the market impact of FOMC minutes by using empirical data to examine its influence on U.S. asset prices (Treasury yields, stock prices, and U.S. dollar exchange rates). The results indicate that the minutes generate higher than normal volatility across different asset classes. For instance, the volatility of two-year Treasury yields is roughly three times larger on days when minutes are released. Additionally, the magnitude of these financial market effects is similar to the impact of other major economic reports, such as the ISM manufacturing index.
The research also reveals that the market response to the minutes has declined since 2008. Rosa suggests one potential interpretation of this finding is that FOMC communication before the release of the minutes has become more informative, possibly indicating that the Committee has achieved greater transparency by releasing news in a timelier manner. A complementary interpretation is that the sensitivity of asset prices and, in particular, of interest rates, to news diminishes when short-term rates hit the zero lower bound.
Carlo Rosa is an economist in the Federal Reserve Bank of New York’s Markets Group.