Predictive Power of Inferred Fed Surprises
Federal Reserve (Fed) policy expectations are a major driver of financial markets, yet traditional measures of Fed surprises are only available around FOMC announcements. This paper develops “inferred Fed surprises”, a real-time framework that extracts changes in expected Fed policy from daily movements in interest rate markets, allowing investors to monitor how monetary policy expectations evolve between official policy decisions. We show that these inferred surprises contain valuable information for market participants: cumulative signals help anticipate the direction of future FOMC-day movements in rates and FX, while signals generated around key economic releases, such as inflation and employment reports, identify trading opportunities arising from delayed adjustments in rates and FX markets. The result is a practical and systematic approach for translating evolving Fed policy expectations into actionable investment signals across both monetary policy and macroeconomic news events.
