Fed Statements, and The Timing of Market Movements

Loyal reader Adam offers:

the question [of why long-term rates Treasury dropped] regards the timing of the fall in long-term yields – was it before or after the Fed announcement?

Scott Sumner has two recent posts on this issue.  In this piece, Scott shows that first (i) equity prices and treasury yields both plummeted immediately after the Fed statement, and then (ii) equity prices subsequently surged while yields stayed low.  He argues that the immediate reaction in (i) reflected the market’s disappointment that the Fed did not explicitly announce QE3, while (ii) reflects “second thoughts”or perhaps a closer reading of the Fed’s statement.

I’m not exactly sure what those [second thoughts] were, but I’ve seen two possibilities discussed.  John McDermott suggested that there was wording similar to the Fed statement that preceded QE2.  Others pointed to the three dissents, suggesting that Bernanke is preparing to move ahead more boldly, and is willing to tolerate a higher number of dissents.

In this subsequent post, Scott reminds us never to reason from a price change, and explains that a drop in long-term Treasury yields could be either

seen as an expansionary move, reflecting greater than anticipated monetary stimulus, or a contractionary move—the Fed throwing in the towel and adopting the Japanese monetary model of ultra-slow NGDP growth.

So in answer to Adam’s question, the fall in long-term yields came after the Fed announcement.  But we still don’t know what that means.  And equity markets aren’t really helping us find the answer.

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About brianbergfeld
I am an economics PhD student at Washington University in St. Louis.

2 Responses to Fed Statements, and The Timing of Market Movements

  1. Adam says:

    This blog rules!

  2. brianbergfeld says:

    Alex Tabarrok tweets: Hypothesis: In past 48 hours there is some time frame such that combination of short and long i rates and stock prices fits any theory.

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