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With the next FOMC meeting and press conference to be held in the U.S. on December 16th, University of Melbourne researcher Dr Vincent Grégoire says this FOMC meeting will decide on a possible first move away from near-zero interest rates in seven years. He says expectation of an increase is higher than it has ever been since the GFC.
Dr Grégoire says that markets do not expect important policy announcements on days without press conferences. Given that the FOMC is believed to dislike surprising markets, this limits the range of actions the Fed can take.
The FOMC, the monetary policy-making body of the U.S. Federal Reserve System known as the Fed, meets eight times per year to discuss the state of the economy and make monetary policy decisions. Press conferences were introduced by the FOMC in 2011 to every second meeting in order to provide more information to the market. However, according to the study, this may actually have lowered transparency.
“The change in the Fed’s communication practice since 2011 has led to two classes of FOMC announcements: Important ones that are accompanied by a press conference, and the others,” Dr Grégoire said.
“Current market data shows high expectations of an interest rate increase at the December meeting,” he said.
“While our research doesn’t predict that specifically, our conclusion suggests that it is more likely that the first increase occurs in December 2015 or March 2016 rather than in January 2016, when there is no press conference scheduled. Given the latest macroeconomic indicators, March 2016 seems too far away.”
The research questions why press conferences are only held at half of the year’s eight meetings.
“They should either have press conferences after each Fed meeting or none at all,” Dr Grégoire said.
“To maintain their goal of increased transparency, the Fed should instead consider holding press conferences after every meeting, as many other central banks do.”
The research also highlighted that stock prices went up only at after meetings followed by press conferences, even though the decision has been to keep rates unchanged at every meeting in the period studied.
“Both the uncertainty about future monetary policy and media coverage prior to the event are much larger if the FOMC announcement is followed by a press conference. This uncertainty is reflected in the reaction of the stock returns and the VIX volatility index to announcements with press conferences.”
Dr Grégoire said the impact of U.S. interest rate rises in Australia would mean the Australian Dollar could decrease in value.
“However, given the high expectations, this is already priced in to a large extent. The Australian Dollar might go up a little if they do not raise interest rates, but this effect will be short lived because it would only put higher expectations on the March meeting.”
The full research paper is available online here.