Pfister and Liebke examine three decades of FOMC meetings, separating interest rate surprises from forward guidance shocks and tracing their effects on the US Dollar and other G10 currencies. Using the Jarociński and Kaladi (2020) split between policy shocks—when equities and interest rates move in opposite directions—and information shocks—when both move together—they find forward guidance matters far more for the dollar in the policy-shock regime.
In policy shocks, the forward guidance factor explains roughly 21% of same-day USD variance, whereas the implied pattern across chair tenures varies. During the latter part of Alan Greenspan’s period and under Ben Bernanke, the interest-rate and guidance decomposition accounts for only a small share of meeting-day USD variance, but under Janet Yellen it more than doubles to almost 39% of daily variance. Under Jerome Powell, the explained variance from this decomposition collapses and both factors become insignificant, alongside a shift of information away from the statement. Over the last 21 meetings since early 2024—two under Warsh and 19 under Powell—the meeting-day change in OIS accounts for around 62% of USD variance.
Shifting Volatility Drivers Under Current Fed Leadership
With the FOMC meeting happening this week, we advise derivative traders to shift their focus away from the initial policy statement. Historically, the immediate text release has lost its power to drive US Dollar volatility under the current Fed leadership. Instead, we must closely monitor the intraday changes in Overnight Indexed Swaps (OIS) and the live press conference.
Recent data from the 2024 to 2026 policy cycles shows that OIS rate changes on meeting days now account for roughly 62% of USD variance. This suggests that the market’s pricing of the terminal rate, currently hovering near 3.5%, is heavily digested during the live Q&A. Traders should look to execute short-term currency options that capture this late-day volatility rather than early-minute spikes.
Policy Versus Information Shocks: Implications for G10 Options
Furthermore, we must distinguish between pure policy shocks and information shocks by watching if equities and interest rates move in opposite directions. In past policy shocks, forward guidance surprises explained up to 21% of G10 currency variance on the day of the meeting. As we navigate the coming weeks, we suggest using G10 straddle options to benefit from these sharp post-conference adjustments.
