Skip to main content Accessibility help
×
Home

Shaping Expectations and Coordinating Attention: The Unintended Consequences of FOMC Press Conferences

  • Oliver Boguth, Vincent Grégoire and Charles Martineau

Abstract

In an effort to increase transparency, the chair of the Federal Reserve now holds a press conference (PC) following some, but not all, Federal Open Market Committee (FOMC) announcements. Evidence from financial markets shows that investors lower their expectations of important decisions on days without PCs and that these announcements convey less price-relevant information. Correspondingly, we show that investors pay more attention to upcoming announcements with PCs. This coordination of attention can reduce welfare in models of the social value of public information. Consistent with theories of investor attention, the market risk premium is larger on days with PCs.

Copyright

Corresponding author

*Boguth, oliver.boguth@asu.edu, Arizona State University Carey School of Business; Grégoire (corresponding author), vincent.3.gregoire@hec.ca, HEC Montréal; and Martineau, charles.martineau@utoronto.ca, University of Toronto at Scarborough and the Rotman School of Management.

Footnotes

Hide All
1

We thank Daniel Andrei (the referee), Bruce Carlin, Murray Carlson, Millicent Chang, Jennifer Conrad (the editor), Silvio Contessi, Adlai Fisher, Neal Galpin, Li Ge, Thomas Gilbert, Bruce Grundy, Brian Kelly, Ali Lazrak, Spencer Martin, Silvia Miranda-Agrippino, Pavel Savor, Yuehua Tang, Masahiro Watanabe, James Yae, Jun Yang, and seminar participants at Arizona State University, the Bundenbank, McGill University, Université Laval, the 2016 China International Finance Conference, the 2016 meeting of the European Finance Association, the 2016 Financial Management Association Asia/Pacific Conference, the 2016 Financial Markets and Corporate Governance Conference, the 2016 Financial Institutions Conference, the 2017 Western Finance Association Regulation and Corporate Governance Conference, and the 2016 Accounting and Finance Association of Australia and New Zealand (AFAANZ) Conference for helpful comments and suggestions. We also thank Jeremy Lao and Agha Mirza of CME Group for providing FedWatch support and data. Martineau gratefully acknowledges financial support from the Social Sciences and Humanities Research Council (SSHRC) of Canada, the Montreal Exchange, and the NASDAQ OMX Educational Foundation. Most of the research was done while Grégoire was affiliated with the University of Melbourne.

Footnotes

References

Hide All
Abel, A. B.; Eberly, J. C.; and Panageas, S.. “Optimal Inattention to the Stock Market.” American Economic Review, 97 (2007), 244249.
Abel, A. B.; Eberly, J. C.; and Panageas, S.. “Optimal Inattention to the Stock Market with Information Costs and Transactions Costs.” Econometrica, 81 (2013), 14551481.
Ai, H., and Bansal, R.. “Risk Preferences and the Macroeconomic Announcement Premium.” Econometrica, 86 (2018), 13831430.
Amador, M., and Weill, P.-O.. “Learning from Prices: Public Communication and Welfare.” Journal of Political Economy, 118 (2010), 866907.
Amador, M., and Weill, P.-O.. “Learning from Private and Public Observations of Others’ Actions.” Journal of Economic Theory, 147 (2012), 910940.
Amato, J. D.; Morris, S.; and Shin, H. S.. “Communication and Monetary Policy.” Oxford Review of Economic Policy, 18 (2002), 495503.
Amengual, D., and Xiu, D.. “Resolution of Policy Uncertainty and Sudden Declines in Volatility.” Journal of Econometrics, 203 (2018), 297315.
Andersen, T. G.; Bollerslev, T.; Diebold, F. X.; and Vega, C.. “Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange.” American Economic Review, 93 (2003), 3862.
Andrei, D., and Hasler, M.. “Investor Attention and Stock Market Volatility.” Review of Financial Studies, 28 (2014), 3372.
Balduzzi, P.; Elton, E. J.; and Green, T. C.. “Economic News and Bond Prices: Evidence from the U.S. Treasury Market.” Journal of Financial and Quantitative Analysis, 36 (2001), 523543.
Banerjee, S.; Davis, J.; and Gondhi, N.. “When Transparency Improves, Must Prices Reflect Fundamentals Better?Review of Financial Studies, 31 (2018), 23772414.
Beber, A., and Brandt, M. W.. “Resolving Macroeconomic Uncertainty in Stock and Bond Markets.” Review of Finance, 13 (2009), 145.
Ben-Rephael, A.; Da, Z.; and Israelsen, R. D.. “It Depends on Where You Search: Institutional Investor Attention and Underreaction to News.” Review of Financial Studies, 30 (2017), 30093047.
Bernanke, B. S.“Transcript of Chairman Bernanke’s Press Conference, April 27, 2011.” Available at http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20110427.pdf (2011).
Bernanke, B. S., and Kuttner, K. N.. “What Explains the Stock Market’s Reaction to Federal Reserve Policy?Journal of Finance, 60 (2005), 12211257.
Bjornland, H. C., and Leitemo, K.. “Identifying the Interdependence between US Monetary Policy and the Stock Market.” Journal of Monetary Economics, 56 (2009), 275282.
Blinder, A. Central Banking in Theory and Practice. Cambridge, MA: MIT Press (1998).
Blinder, A.; Goodhart, C.; Hildebrand, P.; Lipton, D.; and Wyplosz, C.. “How Do Central Banks Talk?” In Geneva Reports on the World Economy 3, London: Centre for Economic Policy Research (2001).
Cieslak, A.; Morse, A.; and Vissing-Jorgensen, A.. “Stock Returns over the FOMC Cycle.” Journal of Finance, forthcoming (2019).
Cox, J.“Fed’s Powell Says He Will Begin News Conferences following Each Meeting Starting in January.” Available at https://www.cnbc.com/2018/06/13/feds-powell-says-he-will-begin-press-conferences-following-each-meeting-starting-in-january.html (2018).
Da, Z.; Engelberg, J.; and Gao, P.. “In Search of Attention.” Journal of Finance, 66 (2011), 14611499.
Da, Z.; Engelberg, J.; and Gao, P.. “The Sum of All FEARS: Investor Sentiment and Asset Prices.” Review of Financial Studies, 28 (2015), 132.
Duffie, D., and Sun, T.-S.. “Transactions Costs and Portfolio Choice in a Discrete-Continuous-Time Setting.” Journal of Economic Dynamics and Control, 14 (1990), 3551.
Fang, L., and Peress, J.. “Media Coverage and the Cross-Section of Stock Returns.” Journal of Finance, 64 (2009), 20232052.
Fisher, A. J.; Martineau, C.; and Sheng, J.. “Macroeconomic Attention and the Stock Market.” Working Paper, University of British Columbia (2018).
Fleming, M. J., and Remolona, E. M.. “Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 19011915.
Gertler, M., and Karadi, P.. “Monetary Policy Surprises, Credit Costs, and Economic Activity.” American Economic Journal: Macroeconomics, 7 (2015), 4476.
Gürkaynak, R. S.; Sack, B. P.; and Swanson, E. T.. “Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements.” International Journal of Central Banking, 1 (2005), 5593.
Gürkaynak, R. S.; Sack, B. P.; and Swanson, E. T.. “Market-Based Measures of Monetary Policy Expectations.” Journal of Business & Economic Statistics, 25 (2007), 201212.
Huang, L., and Liu, H.. “Rational Inattention and Portfolio Selection.” Journal of Finance, 62 (2007), 19992040.
Jones, C. M.; Lamont, O.; and Lumsdaine, R. L.. “Macroeconomic News and Bond Market Volatility.” Journal of Financial Economics, 47 (1998), 315337.
Kacperczyk, M.; van Nieuwerburgh, S. G.; and Veldkamp, L.. “A Rational Theory of Mutual Funds Attention Allocation.” Econometrica, 84 (2016), 571626.
Kahneman, D., and Tversky, A.. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica, 47 (1979), 263291.
Kocherlakota, N.“Bring the Fed’s Dead Meetings to Life.” Available at https://www.bloomberg.com/opinion/articles/2016-10-12/bring-the-fed-s-dead-meetings-to-life (Oct. 12, 2016).
Kuttner, K. N.Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market.” Journal of Monetary Economics, 47 (2001), 523544.
Lucca, D. O., and Moench, E.. “The Pre-FOMC Announcement Drift.” Journal of Finance, 70 (2015), 329371.
Morris, S., and Shin, H. S.. “Social Value of Public Information.” American Economic Review, 92 (2002), 15211534.
Morris, S.; Shin, H. S.; and Tong, H.. “Social Value of Public Information: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con: Reply.” American Economic Review, 96 (2006), 453455.
Nakamura, E., and Steinsson, J.. “High-Frequency Identification of Monetary Non-Neutrality: The Information Effect.” Quarterly Journal of Economics, 133 (2018), 12831330.
Ozdagli, A., and Weber, M.. “Monetary Policy through Production Networks: Evidence from the Stock Market.” Working Paper, University of Chicago (2017).
Piazzesi, M., and Swanson, E. T.. “Futures Prices as Risk-Adjusted Forecasts of Monetary Policy.” Journal of Monetary Economics, 55 (2008), 677691.
Ross, S. A.Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy.” Journal of Finance, 44 (1989), 117.
Savor, P., and Wilson, M.. “How Much Do Investors Care about Macroeconomic Risk? Evidence from Scheduled Economic Announcements.” Journal of Financial and Quantitative Analysis, 48 (2013), 343375.
Sims, C. A.Implications of Rational Inattention.” Journal of Monetary Economics, 50 (2003), 665690.
Stein, J. C.Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements.” American Economic Review, 79 (1989), 3242.
Stein, J. C., and Sunderam, A.. “The Fed, the Bond Market, and Gradualism in Monetary Policy.” Journal of Finance, 73 (2018), 10151060.
Svensson, L. E.Social Value of Public Information: Morris and Shin (2002) Is Actually Pro Transparency, Not Con.” American Economic Review, 96 (2006), 448452.
Timiraos, N.“Powell Weighs Taking Questions after Every Fed Meeting.” Available at https://www.wsj.com/articles/should-the-fed-hold-more-press-conferences-powell-weighs-taking-questions-after-every-meeting-1528823472 (2018).
Veldkamp, L. L. Information Choice in Macroeconomics and Finance. Princeton, NJ: Princeton University Press (2011).
Yellen, J. L.“Transcript of Chair Yellen’s Press Conference, December 17, 2014.” Available at http://www.federalreserve.gov/mediacenter/files/fomcpresconf20141217.pdf (2014).
Yellen, J. L.“Transcript of Chair Yellen’s Press Conference, June 17, 2015.” Available at http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150617.pdf (2015a).
Yellen, J. L.“Transcript of Chair Yellen’s Press Conference, September 17, 2015.” Available at http://www.federalreserve.gov/mediacenter/files/fomcpresconf20150917.pdf (2015b).
Zumbrun, J.“WSJ Survey: Most Economists Don’t See All FOMC Meetings as ‘Live.’” Wall Street Journal (2015). Available at Factiva, doc. no. DJDN000020151008eba80026w.
Type Description Title
UNKNOWN
Supplementary materials

Boguth et al. supplementary material
Boguth et al. supplementary material 1

 Unknown (606 KB)
606 KB

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed