Fed Chairman Jerome Powell. (Photo: AP) Fed Chairman Jerome Powell. (Photo: AP)

When Federal Reserve policymakers meet again in less than three weeks, don’t be surprised if the S&P 500 advances the day before the Fed announces its rate decision. That’s been the pattern before every Fed decision since 1994, when the central bank first began announcing its target range for the federal funds rate.

“U.S. and international equity markets have seen large and statistically significant excess returns in the 24 hours prior to scheduled FOMC,”  according to a recent report from the Federal Reserve Bank of New York.

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Up until March 2011, the advance in stocks began in the afternoon of the day before the Fed announcement and continued into the next morning. Then the Fed began to hold press conferences after every other policy meeting — hosted by its chairperson — and the excess stock market returns began the morning of the day before the Fed decision, but only for meetings that concluded with a press conference. There was no longer evidence of a stock market advance the day before a Fed decision for meetings that did not end with a press conference.

But for those FOMC meetings that ended with a press conference the S&P 500 gained on average about 40 basis points between the open of the previous day up until lunchtime of the day of the announcement and another 30 basis points by the end of the press conference. There  were were no similar gains for more monetary policy-sensitive assets such as Treasuries after or before 2011.

The economists who wrote the New York Fed report — David Lucca, an assistant vice president at the New York Fed, and Emanuel Moench, the Head of Research at Deutsche Bundesbank — note that these stock gains before Fed announcements is “a puzzle” because “risk assets such as equities should trade at a discount ahead of the [Fed] announcements,” and increase in value when the announcement is made, not before.

They offer several explanations for the phenomenon but they’re not conclusive, including this one: Investors turn their attention to monetary policy as a policy announcement approaches. They know that information will be released at meetings that conclude with a press conference, not only from the chairperson who hosts the presser but from members of the FOMC whose economic projections are disclosed only at meetings that include a press conference.

That explanation may be tested soon enough because starting next year the FOMC will conclude every meeting with a press conference. Whether stocks will continue to reap excess returns before every Fed meeting, beginning the morning of the day before the announcement, “remains to be seen,” according to the Fed report.