Research Team at Goldman Sachs, suggests that markets had little doubt that the FOMC would leave the funds rate unchanged at its recent meeting—futures markets implied only about a 5% chance of an increase before the announcement.

Key Quotes

“Yet the decision was clearly a major dovish surprise for markets, with interest rates declining across the curve and the dollar falling against other developed market currencies. This is a common pattern: research shows that much of the market response to FOMC decisions comes from guidance in the statement (and in recent years, the Summary of Economic Projections and press conference) rather than the rate decision itself. This makes quantifying monetary policy surprises more challenging—especially at the effective lower bound, when policy is conducted entirely through forward guidance and quantitative easing.

The meaningful policy surprises in recent years are a puzzle in light of the large amount of information Fed officials now provide about their reaction function. One might have thought that the details provided in the SEP and through the press conference would have made it easier for investors to anticipate the committee’s response to incoming data. Possible explanations might include: (1) uncertainty related to the macroeconomic environment, especially with regard to equilibrium interest rates; (2) uncertainty related to unconventional monetary policy tools, including more deliberate use of communication by the FOMC to ease or tighten; or (3) the fact that markets receive more relevant information at FOMC meetings and less between meetings. Whatever the reason, our measure of policy surprises suggests FOMC meeting outcomes have become more uncertain—especially for SEP meetings—and we are unsure about whether that will change in the near future.”