Interest Rate Surprises When the Fed Doesn’t Speak

The predictability of monetary policy surprises based on past, public information has been interpreted in two related yet fundamentally different ways. The "Fed information effect" posits that it arises due to markets updating their view of the economy, based on signals implicitly revealed by the FOMC. The "Fed reaction to news" explanation posits that markets update their view of the FOMC's reaction function instead. We show that interest rate surprises calculated around macroeconomic releases exhibit the same predictability pattern as monetary policy surprises. Since these occur at a time when there is no scope for markets to learn about the Fed's behavior, this pattern suggests an additional information channel unrelated to FOMC communication.