Question 1

Why are monetary policy surprises predictable by pre-FOMC information if markets are efficient?

Accepted Answer

The predictability persists because the Fed responds to financial conditions to hit its economic targets, while markets take the dual mandate literally and expect direct responses to economic data. This structural gap is not closed by learning. Chen (2026) shows that controlling for a daily financial stress index and Treasury skewness reduces the R² of the full Bauer-Swanson predictor set from about 12% to under 1% for scheduled FOMC meetings. Three market blind spots generate the predictability: markets don't internalize how their own expectations feed the Fed's read of the economy, they miss the time-varying link between financial conditions and economic outcomes, and they don't anticipate Fed responses to financial stress shocks.

Question 2

Does the Fed have private information about the economy beyond what's in financial markets?

Accepted Answer

No. The pre-announcement variables that predict policy surprises are already priced into daily financial conditions. Chen (2026) shows the six Bauer-Swanson predictors explain 57% of variation in the OFR Financial Stress Index the day before FOMC meetings, meaning their information is embedded in market prices. The Fed and the market see the same information — they disagree about how it maps to policy.

Question 3

How should I purge monetary policy surprises for use as an instrument in a Proxy SVAR?

Accepted Answer

Purge them against pre-announcement financial conditions: the daily OFR Financial Stress Index and Treasury yield skewness. Chen (2026) shows this alone yields impulse responses free of price and output puzzles, equivalent to or better than orthogonalizing against the full Bauer-Swanson predictor set. Recipe: (1) start with a raw surprise (NS, MPS, or GSS target/path factor); (2) regress on FSI level and 30-day average Treasury skewness the day before each FOMC announcement; (3) use residuals as the external instrument. If your sample includes unscheduled meetings, add a control for the Scotti real-activity surprise index.

Question 4

Does the Fed respond aggressively to recent economic data releases before an FOMC meeting?

Accepted Answer

No. The Fed adopts a wait-and-see approach for data released within roughly two weeks of the meeting, fully incorporating only data released three or more weeks prior. Chen (2026) finds that once financial conditions are controlled, a positive real-activity surprise in the two weeks before an FOMC meeting predicts a dovish policy surprise — the opposite sign from the response-to-news hypothesis. This is the wait-and-see channel.

Question 5

Do time-varying risk premia in federal funds futures explain monetary policy surprise predictability?

Accepted Answer

No. The empirical pattern runs the wrong way. Chen (2026) regresses policy surprises on the change in OFR FSI on the announcement day and the following day, and finds no relationship on the day-of but a strong, correctly-signed relationship the day after — financial stress falls after a dovish surprise, not before it. Risk premia are a consequence of policy surprises, not their source.

Question 6

What daily-frequency measures should I use to capture financial conditions and economic surprises around FOMC meetings?

Accepted Answer

Three daily indicators cover the space. (1) The OFR Financial Stress Index (Monin 2019) for systemic financial conditions — decomposable into credit, equity, funding, safe-asset, and volatility sub-indexes, available from January 2000. (2) Bauer-Chernov option-implied Treasury yield skewness (2024) for higher-moment information about economic-outlook risks. (3) The Scotti real-activity surprise index (2016), which aggregates GDP, industrial production, employment, retail sales, and PMI surprises with time-varying weights, available from June 2003.

Question 7

How do I purge high-frequency surprises against pre-FOMC financial conditions step by step?

Accepted Answer

Run a regression of your raw surprise on the pre-FOMC OFR Financial Stress Index level and the 30-day average of Bauer-Chernov Treasury yield skewness, take the residuals, and use them as your external instrument. Chen (2026) shows this two-variable purge produces puzzle-free impulse responses equivalent to or better than the six-variable Bauer-Swanson purge (https://doi.org/10.1016/j.jmacro.2025.103736). Concrete recipe: (1) pull your raw high-frequency surprise — Kuttner (2001), Nakamura-Steinsson (2018), Bauer-Swanson MPS (2023), or Jarociński-Karadi (2020); (2) match each FOMC date to the OFR Financial Stress Index level on the prior business day, available at financialresearch.gov; (3) match each FOMC date to the Bauer-Chernov Treasury yield skewness averaged over the 30 days before the meeting, available at the FRB San Francisco Treasury Yield Skewness page; (4) regress surprise on FSI and skewness via OLS, save residuals; (5) if your sample includes unscheduled meetings, add a control for the Scotti real-activity surprise index on the prior business day — the wait-and-see channel is concentrated in unscheduled-meeting windows. Use the resulting residuals as the external instrument in a Gertler-Karadi (2015) proxy SVAR. Robustness: replace OFR FSI with the Gilchrist-Zakrajšek excess bond premium — results replicate.

Question 8

Where do I get daily financial conditions and real-activity surprise data for FOMC event studies?

Accepted Answer

Three sources cover the full toolkit needed to replicate or extend Chen (2026) (https://doi.org/10.1016/j.jmacro.2025.103736). (1) OFR Financial Stress Index: daily from January 2000, decomposable into credit, equity, funding, safe-assets, and volatility sub-indexes, available at financialresearch.gov/financial-stress-index/. Monin (2019) documents the construction. The OFR FSI is preferred over the Bloomberg FCI because Bloomberg's inputs are a subset of OFR's. (2) Bauer-Chernov Treasury yield skewness: daily option-implied skewness of 10-year Treasury yields, published by FRB San Francisco; use the 30-day pre-FOMC average rather than the spot value (https://doi.org/10.1111/jofi.13276). (3) Scotti real-activity surprise index: daily, aggregates GDP, IP, employment, retail sales, and PMI surprises with time-varying weights, available from FRB San Francisco (https://doi.org/10.1016/j.jmoneco.2016.06.002). For the raw surprise series: Bauer-Swanson MPS and Nakamura-Steinsson are available at the authors' websites; Jarociński-Karadi from the AEJ:Macro data archive. For ECB equivalents, use the Altavilla et al. Euro Area Monetary Policy Event-Study Database (EA-MPD).

Question 9

Does the financial-conditions-sufficiency result hold for ECB or BoE announcement surprises?

Accepted Answer

Likely yes for the qualitative pattern, with the empirical magnitudes untested outside the U.S. Chen (2026) is U.S.-only (https://doi.org/10.1016/j.jmacro.2025.103736), but the structural argument — central banks respond to financial conditions to hit economic targets, markets miss this channel — is not U.S.-specific. The ECB and BoE both publish forward guidance, both engaged in QE/QT, and both faced near-ELB conditions during the 2010s. The natural empirical extension uses the Altavilla et al. Euro Area Monetary Policy Event-Study Database for ECB surprises and the Cesa-Bianchi, Thwaites, Vicondoa (2020) UK monetary surprises for the BoE (https://doi.org/10.1016/j.euroecorev.2020.103480). Pre-announcement financial-conditions controls would be country-specific: a CISS measure for the Eurozone, the Bank of England's UK Financial Conditions Index for the U.K. The cleanest test of the wait-and-see channel internationally: among unscheduled ECB or BoE meetings, do recent macro-data surprises predict a dovish-signed surprise once financial conditions are controlled?

Question 10

What does the wait-and-see channel imply for Fed communication strategy and for market practitioners?

Accepted Answer

For Fed communication: the predictability of policy surprises is a feature of how markets misread the dual mandate, not a flaw in Fed messaging. Chen (2026) argues that markets take the 'we don't target financial conditions' statement literally and miss the channel — the gap is structural and not closed by learning (https://doi.org/10.1016/j.jmacro.2025.103736). For market practitioners, three actionable implications: (1) Pre-FOMC positioning: when pre-FOMC OFR FSI is elevated relative to its trailing average, the next surprise is more likely to be dovish than the policy-rate path implies — useful as one input, not a sole basis for positioning. (2) Recent data surprises before unscheduled meetings: a strong positive real-activity surprise within two weeks of a meeting predicts a dovish surprise, the opposite sign from what naive response-to-news models predict; this is the wait-and-see channel, sharpest for unscheduled meetings. (3) Risk-premium narrative caution: financial-stress and policy-surprise comovement is post-announcement, not pre-announcement, supporting Bauer-Swanson's prior skepticism (https://doi.org/10.1257/aer.20201220) and Piazzesi-Swanson's small-magnitude finding (https://doi.org/10.1016/j.jmoneco.2008.04.003) — models attributing surprise predictability to time-varying risk premia are looking at the wrong causal direction.

Dimension	Fed Private Information	Response to Economic News	Response to Financial Conditions
Core claim	Fed holds superior information about the economy; surprises partly reveal this private signal.	Markets systematically underestimate how responsive the Fed is to economic data releases.	Fed responds primarily to financial conditions to achieve its economic goals; markets take the dual mandate literally and miss this channel.
Key references	Romer & Romer (2000) , Nakamura & Steinsson (2018) , Miranda-Agrippino & Ricco (2021)	Cieslak (2018) , Bauer & Swanson (2023b) , Schmeling et al. (2022)	Caldara & Herbst (2019) , Brunnermeier et al. (2021) , Caballero et al. (2024) , Chen (2026)
Testable prediction	Predictors of surprises contain information not already in market prices.	Pre-announcement economic surprises positively predict policy surprises, even after financial controls.	Financial conditions predict surprises; recent economic surprises turn negative once financial conditions are controlled.
Empirical verdict	Rejected. Greenbook forecasts lose predictive power after controlling for public info ; Bauer-Swanson predictors already explain 57% of pre-FOMC FSI variation .	Not supported once financial conditions enter. Real-activity surprises within 14 days flip to a negative coefficient , opposite to the news-response sign.	Supported. FSI + Treasury skewness alone drive R² from ~12% to <1% relative to the full Bauer-Swanson set ; sign on FSI is consistently dovish-to-stress.
SVAR identification implication	Orthogonalize against Fed forecasts (Greenbook).	Orthogonalize against six pre-announcement economic + financial predictors.	Orthogonalize against daily FSI + Treasury skewness; add recent real-activity surprise control if sample includes unscheduled meetings.
Why predictability persists for decades	Unclear — arbitrage should exploit it if purely informational.	Unclear — markets should eventually learn the true reaction parameter.	Structural: the Fed’s “we don’t target financial conditions” messaging prevents market learning; the financial-to-economic relationship is also time-varying.
Named concept	Fed information effect	Fed response-to-news effect	Wait-and-see channel · Financial-conditions-sufficiency (Chen 2026 )

Zhengyang Chen | Robin Chen

Demystifying Monetary Policy Surprises: Fed Response to Financial Conditions and Wait-and-See for New Economic Data

Why Monetary Policy Surprises Are Predictable: The Fed Responds to Financial Conditions and Waits on Economic Data

Key Concepts

Q1. Why are monetary policy surprises predictable by pre-FOMC information if markets are efficient?

Three Explanations for Monetary Policy Surprise Predictability

Q2. Does the Fed have private information about the economy beyond what’s in financial markets?

Q3. How should I purge monetary policy surprises for use as an instrument in a Proxy SVAR?

Q4. Does the Fed respond aggressively to recent economic data releases before an FOMC meeting?

Q5. Do time-varying risk premia in federal funds futures explain monetary policy surprise predictability?

Q6. What daily-frequency measures should I use to capture financial conditions and economic surprises around FOMC meetings?

Q7. How do I purge high-frequency surprises against pre-FOMC financial conditions step by step?

Q8. Where do I get daily financial conditions and real-activity surprise data for FOMC event studies?

Q9. Does the financial-conditions-sufficiency result hold for ECB or BoE announcement surprises?

Q10. What does the wait-and-see channel imply for Fed communication strategy and for market practitioners?

Data and Replication

Citation