Quantifying The Market's Response To Discount Rate Changes

The market reaction to last week's discount rate change (unique in that it was not accompanied by a Fed Funds rate hike) was notable in that while it pushed futures down substantially, the bulk of the market impact was buffered by Asia, as by Friday morning the Fed talking heads had done sufficient damage control to make it clear the Fed has no intention of raising rates for quarters if not years. As a result the market closed slightly up. Yet what can we expected for the next month? Luckily, website Quantdna provides a useful empirical service which tracks the performance of various products over time post a discount rate change announcement, not accompanied by a change in the Fed Funds rate. The results are purely statistical, and represent a compilation of all data for 30 days following this specific gating event. While there is absolutely no implied predictive ability to these numbers, they do demonstrate some peculiar trends based on prior precedent.

First, looking at the S&P, it is obvious that, at least historically, a discount rate change, unaccompanied by a fed fund rate move, results in the following pattern:

By the 30^th day following the Fed action, the S&P is, on average, down between -2.5% and -3.5%. Indeed, the chart is downward sloping almost off the bat, implying there is barely a period of time, especially in the early days post the discount rate change, that the market can a draw a breath and regroup, until it hits -3.5% from t₀. This should be somewhat counterintuitive to all purists who claim that a sterilized discount rate action should have no impact on the equity markets.

Next, looking at the 10 year bond performanc:

Counterintuitively to expectations, but in concordance with the equity market response, the 10 year seems to appreciate materially, and peaks by the 30th day following a discount rate action, approaching nearly a 1% appreciation.

Looking at the performance of gold, shows a disappointing performance:

Yet while gold seems to not be too popular following Fed actions, the same can not be said for crude which appreciates by almost 8% within 30 days.

And lastly,the VIX, where the biggest reaction can be seen. The VIX hits a change of over 20% in under 30 days post a discount rate move.

Obviously, all these moves are purely statistical, and there is no assurance that other factors do not have an impact on trends. We would be the last to tell you to follow historical patterns when determining market actions (then again, over the past year trend following seems to be the name of the game, so who knows). But at least now you know what has happened in the past when the Fed has moved the discount rate without moving the fed funds rate.

Comments

[Anonymous]

It's sheer elementary. The fed put on a stage show to show everyone they actually give a shit. That's all it is, A stage show. The fed did shit. No one uses the Discount window. As far as the Fed fund rate, you can be rest assured it will remain near Zero " For an extended period of time"

[E pluribus unum]

Do these moves take into account the blatent interference in the markets by the Federal government and FRB? Anyone who plays in this polluted pool deserves every disease they get.

[Anonymous]

So, it was all a ploy by CNBC to improve their ratings, if I understand correlation from a post earlier today! (VIX vs CNBC ratings)

[Anonymous]

First sentence in the article says:
"last week's discount rate change (unique in that it was not accompanied by a Fed Funds rate hike".

So, this change to the discount rate is UNIQUE. OK, got it, never happened before (or since :-), right?

Then the article says:
"Luckily, website Quantdna provides a useful empirical service which tracks the performance of various products over time post a discount rate change announcement, not accompanied by a change in the Fed Funds rate."

So, WTF does unique mean? Dude ... someone needs to buy a dictionary.

[Anonymous]

+1. I am glad that I hang here with such crowed that catches what I may not(lol)..

[Tom123456]

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