The impact of economic news on expected changes in monetary policy

Asset prices may react to news through changes in expected monetary policy. We examine whether economic news directly affects expected changes in monetary policy, measured by changes in federal funds rate futures prices. Because these prices depend on monthly averages of the effective funds rate, the timing of FOMC meetings relative to news announcements is important and we derive a method of weighting the news that incorporates this timing. We find that the market raises (lowers) its expected change in the funds rate target after news that inflation was higher (lower) than expected or employment was stronger (weaker) than expected.