The Fed‘s new communication regime and volatility

Research evidence excerpt

The Fed‘s new communication regime and volatility

Barclays | Interest rate derivatives

The first is based on intraday rate moves around FOMC statements going back to 1994,

which measure the extent to which the market was surprised. The second is the drop in the

implied volatility of short-expiry rates options from before the meeting to after, which

measures the extent to which the meeting resolved (or did not resolve) uncertainty about the

future path of rates.

• FOMC meetings delivered more intraday surprises in the 1990s than has been the case in

recent decades, with the exception of the hiking cycle of 2022-23. FOMC meetings over the

past 15 years have also tended to be associated with greater declines in implied volatility

in rates (more uncertainty resolution). Both of these effects suggest that markets have more

information about the Fed's forward-looking reaction function than they did in the past.

• But this does not address the question of whether Fed surprises result in higher volatility or

are simply correlated with it because both reflect macro uncertainty. Measures of macro

forecast dispersion are closely linked to interest rate volatility. Using them as a "non-market"

control for the macro uncertainty, we show that when the Fed surprises markets at

meetings, it raises rate volatility regardless of the macro backdrop.

• At the June 2026 meeting, the statement became shorter and removed much of the language

describing how the Fed would respond to future developments; this is vol positive. But

macro uncertainty is expected to fall; the overall macro backdrop is vol negative. A

shortened FOMC statement and the first Warsh FOMC meeting suggested that the Fed is now

more likely to surprise markets. But the final word on vol has yet to be said.