A Berkeley professor has found a pattern in when the Fed leaks secrets
Pssst, want to play the market? Count the Fed leak weeks: study
U.S. central bankers not only regularly leak secret information about monetary policy, but the leaks are so predictably timed that a savvy investor without access to the leaked information could make money just by buying stocks in certain weeks.
That is the bottom line from new research by University of California Berkeley professor Annette Vissing-Jorgensen and colleagues, presented on Saturday at a conference attended by central bankers from around the world.
Vissing-Jorgensen and her colleagues found that the stock market delivers better returns versus Treasury bills the second, fourth, and sixth weeks after each of the Fed's eight policy-setting meetings during a given year. During odd weeks, returns are poor, they found.
An investor could simply exit the stock market during odd-numbered weeks, and return during even-numbered ones, and make much more than an investor who stayed in the stock market the whole time, they suggested.
The weeks that have excess stock-market returns are generally the same in which there are closed Fed Board meetings, and increased volatility in short-term interest-rate futures contracts suggests that it is information on monetary policy from those meetings that is driving the pattern.
"The most important and likely channel through which information gets from the Fed to asset markets is informal communication with the media or private financial institutions," Vissing-Jorgensen wrote.
The Fed has been under increasing fire for what some lawmakers see as lack of transparency and accountability, with Republican politicians most recently tussling with Fed Chair Janet Yellen over the central bank's alleged leak of confidential information in 2012, under then-Chairman Ben Bernanke.
According to Vissing-Jorgensen, however, such leaks - or informal communications, as they are termed in the academic literature - occur frequently and are not necessarily bad. Fed officials may want to test market reaction to a particular policy move ahead of time, and leaks are one way to do so.
The Case For Staying USD Bulls Into FOMC - Goldman Sachs "Next week, we expect the Fed to announce its first rate hike in over a decade. Historically, rate hike cycles are anticipated by markets, lead to slowly evolving economic shifts and are well digested by markets. The upcoming rate hike fits this template in some aspects, but there are elements of the current landscape that may make this time different on several fronts.
...With Fed hikes looming, easing elsewhere, and low inflation priced, we are bullish the USD and bearish rates, given that inflation risks seem to be overly discounted by markets. US equities may be stuck somewhere in the middle, with growth low and level, rates rising and financial conditions tightening. The data flow has not been encouraging either. Even if the Fed is mindful of not overtightening financial conditions, it will be equally careful not to get too far behind the curve. And if the data do pick up, it may need to rein in growth expectations.
Although the ECB disappointed markets in early December, we continue to be USD bulls. In large part this is because of how differentiated the US policy path is and how much more hiking we expect relative to the market, and because both Japan and Europe are still in easing mode. Of course, much of this has been reflected in markets already, and to some extent this is why the market reaction to the ECB communication was so dramatic.
But from here, we still expect the USD to strengthen in 2016, with a revised year-end forecast of parity vs. the Euro and an unchanged forecast of 130 versus the Yen. And we continue to recommend a Top Trade to go long the USD against an equally weighted basket of Yen and Euro."
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A Berkeley professor has found a pattern in when the Fed leaks secrets about monetary policy
U.S. central bankers not only regularly leak secret information about monetary policy, but the leaks are so predictably timed that a savvy investor without access to the leaked information could make money just by buying stocks in certain weeks.
That is the bottom line from new research by University of California Berkeley professor Annette Vissing-Jorgensen and colleagues, presented on Saturday at a conference attended by central bankers from around the world.
Vissing-Jorgensen and her colleagues found that the stock market delivers better returns versus Treasury bills the second, fourth, and sixth weeks after each of the Fed's eight policy-setting meetings during a given year. During odd weeks, returns are poor, they found.
An investor could simply exit the stock market during odd-numbered weeks, and return during even-numbered ones, and make much more than an investor who stayed in the stock market the whole time, they suggested.
The weeks that have excess stock-market returns are generally the same in which there are closed Fed Board meetings, and increased volatility in short-term interest-rate futures contracts suggests that it is information on monetary policy from those meetings that is driving the pattern.
"The most important and likely channel through which information gets from the Fed to asset markets is informal communication with the media or private financial institutions," Vissing-Jorgensen wrote.
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