Central Bank Expectation Management and Analyst Forecast Performance

Managing market expectations about monetary policy through communication is important for central banks. However, this expectation management often shows inefficiency in practice, leading to the misalignment between central banks and market participants. This misalignment is likely to influence financial analysts, who are a crucial part of the financial market. In this paper, we examine the impact of the misalignment between the Fed and market participants on analysts’ performance. Using Fed’s monetary policy surprise as a proxy for the misalignment, we find that this policy surprise worsens analysts’ forecasts and leads to their overreaction to the Fed. Moreover, this inefficient response is amplified by the level surprise, turning point FOMC meetings and unscheduled FOMC meetings. Next, we explore the impact of changes in FOMC communication strategies. This further investigation shows that improved FOMC post-meeting disclosure might not be an efficient way in the sense that it exacerbates analysts’ inefficient responses. Finally, we find that the analysts’ overreaction to Fed’s monetary policy surprise can be moderated by the following firms’ information disclosure. Overall, our results indicate the importance of central bank expectation management