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WORKING PAPER

The Impact of the Federal Reserve Bank's Open Market Operations

Campbell R. Harvey

Duke University, Durham, NC 27706 USA

National Bureau of Economic Research, Cambridge, MA 02138

Roger D. Huang

Vanderbilt University, Nashville, TN 37203

Abstract

The Federal Reserve Bank has the ability to change the money supply and to shape the expectations of market participants through their open market operations. These operations may amount to 20% of the day's volume and are concentrated during the half hour known as `Fed Time.' Using previously unavailable data on open market operations, our paper provides the first comprehensive examination of the impact of the Federal Reserve Bank's trading on both fixed income instruments and foreign currencies. Our results detail a dramatic increase in volatility during Fed Time. Surprisingly, the Fed Time volatility is higher on days when open market operations are absent. In addition, little systematic differences in market impact are observed for reserve-draining versus reserve-adding operations. These results suggest that the financial markets correctly anticipate the purpose of open market operations but are unable to forecast the timing of the operations.