The Transient Impact of FOMC Announcements on Stock Returns

We investigate the impact of Federal Open Market Committee (FOMC) announcements with press conference (PC) on the financial and volatility markets. We find strong pre-FOMC announcement drift, i.e., large excess returns are generated on equity prior to the FOMC announcement. However, the impact of the FOMC - PC announcements is transient, i.e., it disappears after the FOMC announcement. This result contrasts with Lucca and Moench (2015) who report that the impact of FOMC announcement is permanent. We find a negative drift in the volatility before the FOMC - PC announcements and a pronounced asymmetric volatility effect. When analysing trading strategy we quantify the dollar amount associated with pre-announcement return and find it substantial. As the impact of FOMC announcements on stock returns is transient, it raises the question whether FOMC justifies such a movement in economic terms.