The FOMC published a research report that showed since 1994, there has been a large and statistically significant excess return on equities on the day before the FOMC announcement, and the morning of the second day of the FOMC meeting (two-day Fed meeting). This has profound implications for traders. If you have a long position going into the Fed Drift period, you can hold the position and then sell just before market close on the day before the FOMC announcement. If you are in cash and looking for the market to reverse, you should not make too much of what appears to be a major reversal because it may just be Fed Drift. If you are short the market, you may want to cover your short the day before Fed Drift begins.
The report reads:
We document that since 1994, the S&P500 index has on average increased 49 basis points in the 24 hours before scheduled FOMC announcements. These returns do not revert in subsequent trading days and are orders of magnitude larger than those outside the 24-hour pre-FOMC window. As a result, about 80% of annual realized excess stock returns since 1994 are accounted for by the pre-FOMC announcement drift.
You can read the entire Fed Drift research report here.<< Back to Glossary Index