Are US Monetary Surprises Surprising? Evidence from Global Markets

Abstract

We show that FOMC announcement surprises are predicted by preceding ECB monetary policy announcement surprises. Specifically, a 1 p.p. ECB monetary policy surprise predicts a subsequent 0.25 p.p. FOMC surprise. We find little evidence that this predictability is due to the Fed using the ECB to update forecasts on the US economy or to the ECB releasing new information pertinent to near-term US macroeconomic conditions. Instead, we propose that the Fed responds to non-US economic conditions more strongly than investors expect. We find that the component of FOMC surprises predicted by ECB surprises has significant effects on the US economy. Our results suggest that the Fed’s response to non-US news is an important facet of monetary policy.

Sergey Sarkisyan
Sergey Sarkisyan
Ph.D. Candidate in Finance

My research interests include financial intermediation, debt markets, and monetary policy